The world of work has changed. So have the ways we pay and support workers.

As more people choose flexible employment, the debate between umbrella and PAYE models continues to evolve. But with regulatory reform on the horizon and workforce needs becoming more complex, the question is no longer just about cost. It is about care, compliance, and clarity.

This blog explores the differences, pros and cons, and what employers and workers should consider when considering new changes coming in 2026.

 

Understanding the Basics

Umbrella companies act as intermediaries between contractors and recruitment agencies or end clients. Workers become employees of the umbrella company, which handles payroll, tax, National Insurance, and statutory benefits. Contractors typically submit timesheets and are paid after deductions.

PAYE (Pay As You Earn) is a payroll system where workers are directly employed and paid by the business or an employment intermediary like Sonovate. Tax, National Insurance, and other deductions are handled at source. It is clear, compliant, and HMRC-recognised.

 

Why Has Umbrella Been So Popular?

Umbrella models grew in popularity as they offered a quick and flexible solution for managing contractors, especially those working on short-term assignments. For some workers, this brought convenience, especially when working across multiple contracts.

But not everything has worked in favour of umbrella models.

Recent years have seen growing concerns over transparency, fairness, and tax compliance. In particular:

  • Some umbrella companies have been criticised for hidden fees or unlawful deductions.
  • Workers may feel disconnected from employers, leading to confusion about rights and entitlements.
  • HMRC investigations have found issues with mini umbrella company fraud and disguised remuneration schemes.

As a result, the government has proposed reforms to the umbrella working system. New legislation is due in 2026, following a 2023 consultation. This initiative will focus on enhancing transparency, protecting workers, and improving oversight of umbrella companies.

 

Where PAYE Offers a Clear Advantage

With PAYE, there is less room for confusion. Workers know who employs them, what they are paid, and what deductions apply. Employers benefit from full transparency and reduced compliance risk.

 

PAYE also:

  • Gives workers direct access to holiday pay, sick pay, and pension contributions.
  • Eliminates the risk of non-compliant umbrellas damaging your reputation.
  • Makes onboarding and payroll processes more straightforward for all parties.

Workers also avoid additional deductions often associated with umbrella companies. Under an umbrella model, the margin or service fee charged by the provider is deducted directly from the worker’s pay, meaning the cost of using the service is carried by the individual. With PAYE, however, employers have the legal right to pass on the associated employment costs – including employer National Insurance, pension contributions, and holiday accrual – to the end client within the charge rate. This makes PAYE more transparent and, ultimately, cost-neutral for the business.

For businesses, the move to PAYE can strengthen relationships with their workforce and help build long-term trust.

 

Choosing the Right Approach

There is no one-size-fits-all model. Some contractors prefer umbrella setups for ease of use across multiple contracts. Others value the clarity and consistency of PAYE.

However, with the 2026 reform approaching, many organisations are re-evaluating their options.

According to research from the Freelancer & Contractor Services Association (FCSA), over 65% of contractors said they would prefer a transparent PAYE model if given the choice.

And in a 2024 CIPD report, 83% of HR leaders said clear compliance and worker experience would be critical factors when choosing how to engage contingent workers over the next three years.

 

Final Thoughts

The way we pay people matters. It affects trust, compliance, retention, and brand reputation.

As the market continues to shift and regulatory pressures increase, understanding the difference between umbrella and PAYE is essential.

 

What steps is your business taking to future-proof its workforce model?