PAYE or Umbrella?
Packing and moving your life to the opposite hemisphere is both an exciting and daunting experience. This blog aims to unpack one of the most significant stressors; how much am I going to earn and what deductions should I expect on my payslip.
In our experience, Teachers will regularly discuss what daily rate (gross pay) they are on with other Teachers. Rarely does this discussion extend to the more important question, what is the take home (net pay) amount earnt.
Over the many years working in education recruitment I have had to try and explain this to countless teachers. I have found it incredibly complex, and it is hard to find quality information online, hence this blog.
In short, if you choose to be paid through an Umbrella company, you are choosing to accept that the Employers National Insurance cost will be included in your daily pay rate, leading to significantly more deductions (approximately 13.25% of everything earnt after £190 per week).
PAYE or Umbrella?
When signing up with an agency it is impoartant to ask the question, will I be paid directly through PAYE or indirectly through an Umbrella Company.
At Swift Education we advise all temporary staff to be employed directly through PAYE. The reasons being;
There are significantly less deductions for you as a teacher
Pay slips are generally easier to comprehend
It is much easier for any pay queries to be resolved quickly and easily as we run all payroll internally rather than outsourcing through an Umbrella company.
What deductions should I be expecting?
For both PAYE and Umbrella you can expect the following deductions
PAYE Tax
Employee National Insurance
Pension*
If you are paid through Umbrella you should also expect the following deductions from your Gross Pay.
Employers National Insurance (calculated at 13% of everything above £190 per week)
Account Management Fee
PAYE Tax (both PAYE and Umbrella)
Both Umbrella and PAYE will have this deducted from your payslip as and when it is due. It is calculated automatically by HMRC and based of your tax code and earnings within each financial year.
20% of earnings between £12,570 and £50,270 will be deducted on a cumulative basis. Anything above £50,270 is taxed at 40%. Source
Employee National Insurance (both AYE and Umbrella)
All employees are liable to pay Employees National Insurance every week and should read as a separate deduction to PAYE on your payslip.
The Employee NI tax rates for most employees is 12% of earnings above £242 per week. Click here for detailed figures
If you are being paid directly through an agency's payroll, PAYE and Employee NI are the only deductions from your salary, along with pension if you choose to be enrolled.
If you have signed up to be paid through an Umbrella company, the agency has outsourced the payroll to a third-party provider. In doing this you will still pay the above-mentioned PAYE tax and Employees’ National Insurance but will also be liable for a further deduction, in Employer’s National Insurance along with a account fee from the Umbrella company.
Employer’s National Insurance (Umbrella Only)
When you join an Umbrella company you are accepting to pay the Employers National Insurance liability, which is included in your daily pay rate.
For most people it is calculated at 13.25% for everything earned above £190 a week or £823 a month.
Typically, agencies will lure you in with an inflated daily rate, which can be inflated because they include this Employers National Insurance in the quoted daily rate. You will be left thinking you are being paid more, when the truth is this amount will be deducted from every pay slip, leaving you with far greater deductions and a reduced take-home figure.
If you are paid directly through the Agency on PAYE, your employer is liable for this amount, which is why their quoted daily rate will be lower.
Account Fee (Umbrella Only)
It is important to do your own research before deciding how to be paid in the UK. Over the many years working in education recruitment I have had to try and explain this to countless teachers. I have found it incredibly complex, and it is hard to find quailty information, hence this blog.
At Swift Education we advise all temporary staff to be employed directly through PAYE and paid on a weekly basis. The reason being, there are significantly less deductions for employees, the pay slips are easier to comprehend, and it is much easier for us to resolve any pay queries quickly and easily as we run all payroll internally. There is more work for us as an agency to do this but ultimately, we do it to ensure teachers are better off financially.
Employee National Insurance
All employees pay this every week/month. It is separate to PAYE; you will have this amount deducted each pay. Healthcare is free in the UK, which is great. This is only possible because of the NI contributions.
PAYE Tax
We discussed earlier how and when it is calculated. Both Umbrella and PAYE will have this deducted at the appropriate time. Employee A started in January, so won’t reach the £12,570 threshold this financial year and therefore won’t pay any PAYE. As you can see this is currently £0. From April onwards, 20% of earnings above $12,570 will be deducted on a cumulative basis.
If you are being paid directly through PAYE, these should be the only amounts deducted from your salary, along with pension if you are enrolled.
If you have signed up to be paid through an Umbrella company, the agency has outsourced the payroll to a third-party provider. In doing this you will still pay the above-mentioned PAYE and employees’ NI but will also be liable for a further deduction, Employer’s National Insurance.
Employer’s NI
For most people it is calculated at 13.25% for everything earned above £190 a week or £823 a month. Everything you earn above this threshold someone is liable to pay.
If you are paid through an Umbrella company, you are liable to pay this deduction as you are technically the Employee and Employer for Tax purposes. Typically, agencies will lure you in with an inflated daily rate, which is inflated because they don’t have to cost anypay the Employers NI, they have passed it onto you. You will be left thinking you are being paid more, when the truth is you are paid more, but this extra amount and will be deducted to give you a reduced take-home figure.
If you are paid directly through the Agency on PAYE, your employer is liable for this amount. It has nothing to do with your daily rate. Because the employer must pay for this, your daily rate will be lower, but your deductions will be significantly less. If you look at the above pay slip on the bottom left, the employers’ National Insurance for this week alone was £125.23.
Account Fee
When you are paid through an Umbrellla company there will also be an additional Account Fee that the Umbrella Charges each week. Its normally capped between £5-£15 per week, it would be worth speaking
Summary
Umbrella companies are good for agencies. They enable agencies to avoid paying Employers National Insurance. They do this by hiding it in inflated daily payrate offered to Teachers. These Teachers are often unknowingly paying this liability without even realising it.
Umbrella companies do have some perks, including things like discount card, cheaper memberships to gyms or other incentives signing up.
If you are working through multiple agencies at the same time, there is a benefit of the Umbrella company being your sole employer and with this keeping the normal tax code. If you are working with Multiple agencies this can be of benefit as you will keep the normal tax code.
In our experience Teachers are nearly always better off being paid directly through PAYE.
I would encourage anyone who has a different view to comment below or contact us directly via our website.