Recruitment agencies who place temporary workers have three main payment options: limited company, umbrella and PAYE.

Each of the options have pros and cons. Ultimately, which route you choose to go down will be influenced by your sector and business structure.

This article provides an overview to limited, umbrella and PAYE – outlining what you need to know to determine which route is best for your recruitment agency.

Limited company

Limited company refers to the contractors company structure. One of the most popular business models for all sizes of organisation, a limited company offers the individual (contractor) several benefits. Being Ltd company owner also means the contractor will have a number of statutory and financial obligations to meet.

IR35 Considerations

If the contractors work is subject to IR35 then the benefits of contracting via a Limited company reduced, and an umbrella company or PAYE may be the best option. More on IR35 and recruitment agencies here.

Limited company pros and cons

Agency pros

  • Simple process to pay contractor
  • B2B relationship (not an ‘employee’)
  • No employment rights to consider

Agency cons

  • IR35 liability in the public sector falls to the agency.
  • Proposed changes to IR35 in the Private Sector, 2020

Contractor pros

  • Minimising personal liability
  • Tax efficiency and planning
  • Higher personal remuneration
  • Separate legal identity
  • Assuming no fraud has taken place, ‘limited liability’ means you will not be personally liable for any financial losses made by the business.
  • Because a limited company is a distinct entity from its owners, it may be a little easier for a company to secure business loans and investment.

Contractor cons

  • No employment rights or holiday pay
  • Need to have Professional Indemnity insurance and Public Liability insurance 
  • Must be officially incorporated at Companies House.
  • Not suitable for undischarged or disqualified directors.
  • Required to disclose personal and corporate information on public record.
  • More complex and time-consuming accounting requirements.
  • Must send a Company Tax Return and annual accounts to HMRC every year.
  • Must adhere to strict record-keeping requirements, including taking minutes of meetings and recording all decisions taken by directors and shareholders.

Umbrella company

An umbrella company is a separate company that acts as an employer for temporary workers / contractors working on fixed term contracts. 

The way in which an umbrella company works is pretty-straightforward. 

  1. The temporary worker / contractor becomes an employee of the umbrella company.
  2. You transfer gross payments to the umbrella company to pay the temporary worker / contractor for the work they’ve completed.
  3. The umbrella company pays the temporary worker / contractor their net pay, deducting the umbrella fee, employers and employees NI, tax and apprentice levy. 

Each quarter your agency is required to report to HMRC, all payments made (in relation to the supply of staff) where they don’t deduct employment taxes and NI at source.

Umbrella company pros and cons

Agency pros

  • Employment rights sit with umbrella as the temporary worker / contractor is an employee of the umbrella company 
  • Temporary worker / contractor is covered by umbrella insurance
  • Minimise administration costs relating to in-house payroll, pensions, worker insurances and compliance
  • IR35 compliant
  • Account management and support
  • Regulatory advice and briefings

Agency cons

  • Non regulated industry (look for FCSA accredited suppliers)
  • Dealing with 3rd party
  • Compliance concerns of umbrella administration in some sectors (construction, education, low income)
  • Complicated payslips
  • Potential confusion on taxable expenses

Contractor pros

  • Continuous employment record, helpful for securing a loan or applying for a mortgage
  • Eligible for holiday pay and pension
  • Access to benefits like statutory sick pay and paternity/maternity pay
  • Typically covered by employers’ liability, public liability and professional indemnity insurance
  • Employed levels of tax and NI is calculated and paid. However tax relief is available on any allowable business expenses, where the contractor isn’t subject to supervision, direction or control

Contractor cons

  • Contractor has to pay for service (ranging from £10-35 per week, depending on what the agency manages to negotiate with the umbrella)


PAYE means your agency pays the temporary worker / contractor direct.

As your agency is effectively employing the temporary worker/ contractor, you will be responsible for deducting tax, National Insurance and holiday pay. 

Other deductions you may need to make include student loan repayments or pension contributions

When you run the payroll, you’ll need to report your employees’ payments and deductions to HMRC on or before each payday.

Typically, agencies can either run the payroll in-house or outsource to a payroll bureau.

PAYE pros and cons

Agency pros

  • In full control of process 
  • Can run parallel to current PAYE process
  • No third party involvement
  • No compliance ‘grey areas’

Agency cons

  • Responsible for employment law compliance (unless outsourced to PAYE bureau)
  • Need back office infrastructure in place 
  • Maintaining compliance with latest employment law is agency responsibility

Contractor pros

  • No cost to contractor
  • Full employment status
  • Eligible for holiday pay and pension
  • Access to benefits like statutory sick pay and paternity/maternity pay

The tipping point

A key consideration on whether to go down the umbrella or PAYE route is cost and time. 

Would employing contractors direct push your business into another tax bracket? Do you have the time to run in-house payroll and stay up to date with HMRC legislation and reporting requirements? Have you evaluated the cost benefit from moving

For example, if the cost to run PAYE is £50k per year (salaries and cost) evaluate what the cost benefit would be from pursuing the umbrella route. 

Evaluating an Umbrella provider

Key considerations when choosing an umbrella company to work with include: sector and marketing experience, team setup and structure, director background checks, SLAs, processes, fees and industry accreditations (FSCA, APSCo, REC etc) 


Quick note on how Sonovate manages payments

Sonovate main forms of payment are:

  • Directly into the limited contractors bank account (the contractor manages tax affairs themselves)
  • Send gross payments for contractor to an umbrella company deduct employers and employees NI, tax and apprentice levy before paying the temporary worker / contractor.
  • *PAYE service available from Q4 2019