Contractors' Questions: Is brolly PAYE the same as agency PAYE?

Contractor’s Question: Ahead of the IR35 shake-up in the public sector, I wish to know how -- if at all -- PAYE via an agency, or via the end-client differs to PAYE via an umbrella. Surely the same basic calculations apply and any difference is only minimal?

Expert’s Answer: If PAYE is being applied then this is applied in the same way regardless of who the employer is. This is because of the fact that a PAYE calculation is based upon an individual’s personal tax-free allowance and the various income tax and National Insurance rates that apply in the UK tax system. Of course, these are not variables that change simply based on who your employer is.

However, there is a key difference between the umbrella option and the other options you mention. The umbrella company will work with your ‘all inclusive’ contract rate whereas the agency PAYE and end-user PAYE options will work with a PAYE rate.

The difference between the ‘all inclusive’ rate and the PAYE rate is that the ‘all inclusive’ rate is the PAYE rate plus the employer costs. What this means is that you’ll see both employer and employee tax and NI deductions made from your ‘all inclusive’ rate. But via the lower PAYE rate, you’ll only see employee deductions being made since the employer will account for the employer costs separately (out of the increased margin that they have generated by converting you’re ‘all inclusive’ rate to a PAYE rate). Provided that the conversion between the ‘all inclusive’ rate and the PAYE rate is done correctly, this in itself shouldn’t change your final net retention since the same overall amounts of tax and NI would apply in both scenarios.

In reality however, you will see some differences in the calculations produced by the various entities. But this wouldn’t be the result of PAYE being applied differently to a consistent earnings amount. Instead, it would be due to variables such as whether (and to what extent) the provider of the payroll function was passing running costs down to you, which would have the effect of creating variations in the actual amount of your taxable earnings under each model. Such costs could be the very visible application of a margin, as is the case with umbrella companies.

But they could also take the form of an agency or an end-user reducing your ‘all inclusive’ limited company rate of pay by an amount larger than the tax-related employer costs that they will become responsible for, should they become your employer and pay you through their own PAYE.

To definitively work out what’s what, I recommend that you obtain detailed calculations for each of the options available to you, so that you can make an informed choice as to which option is most appropriate.  

The expert was Marc Scott, a director of umbrella company Liberty Bishop.