Huge difference in take-home pay between umbrella PAYE and agency PAYE

[NFH]

I've been contracting and consulting in banking for over 20 years via my own limited company. I have just been offered a contract via a well-known recruitment agency at a well-known bank.

Now that the banks refuse to engage with limited companies because of IR35, the recruitment agency has offered me two PAYE options:

• Be employed by one of their choice of umbrella companies, e.g. Paystream or Giant, who will deduct their fee, employer's NI and an apprenticeship levy from my daily rate, before calculating my PAYE in the conventional way. This is confirmed by illustration documents.
• Be a temporary worker under a contract for services with the agency, who will make no deductions from my daily rate before calculating my PAYE in the conventional way. This is confirmed in an illustration and the contract, which is ready for signature.

The agency is trying to push me towards umbrella companies, and even discouraged me from using the agency's own PAYE, saying it was rubbish. Gaining sight of the agency's PAYE contract and illustration was like getting blood out of a stone.

Why would anyone choose an umbrella company and suffer three hefty deductions, causing such a large reduction in take-home pay, instead of using agency PAYE? Am I missing something? Why is there a difference in which party funds the employer's NI cost between umbrella company PAYE and agency PAYE? Should I consider any other options?

[eek]

There is no difference as the Employer NI will always come out of the gross payment the agency receives from the end client

So the Agency gets £600 a day and pockets £100 to themselves.

The £500 that is left is what the agency has to pay you with. They will then either:-

1) if you use agency payroll deduct all those employer costs and pay you what remains (plus a bit more margin for safety)
2) pay that £500 to the umbrella you choice and the umbrella will deduct those costs before paying you.

All you are showing me here is that once again an agency has completely and utterly failed to explain to you how the world actually works and promised you a rate without explanation that makes you think the umbrella is doing something wrong (hint the umbrella isn't, but your agency has screwed up the explanation).

However, if you have decent documentation that doesn't explain how agency PAYE works and a key information (or other written document such as an email) that shows that you would receive the £500 as I describe it above via the agency PAYE take them up on the offer but don't expect to be paid it. However you should be able to recover it when you finish the contract by taking them to an Employment Tribunal for illegal deductions.

[Amanensia]

If the "three hefty deductions" are the Umbrella's fee, Employer's NI and the apprenticeship levy, you'll be paying the second and third one either way. If the agency thinks they've got a way of avoiding paying ERNI, I'd stay well away from them...

The Umbrella fee won't be huge. If there's really a huge difference in take-home between agency PAYE and Umbrella PAYE, and both are legitimate, it can only because they aren't comparing apples with apples (different assumptions over numbers of days worked perhaps?) or that the total amount being paid by the client under the two scenarios is different.

[NFH]

All you are showing me here is that once again an agency has completely and utterly failed to explain to you how the world actually works and promised you a rate without explanation that makes you think the umbrella is doing something wrong (hint the umbrella isn't, but your agency has screwed up the explanation).

The contract doesn't state that they will deduct Employer's NI. Maybe I should just sign it, and then it will be contractually binding. Furthermore, the agency's illustration agrees with the contract that the agency will not deduct Employer's NI. For the same daily rate, the take-home pay figure in the agency's illustration is substantially more than the take-home pay figure in the umbrella's take-home pay figure.

However, if you have decent documentation that doesn't explain how agency PAYE works and a key information (or other written document such as an email) that shows that you would receive the £500 as I describe it above via the agency PAYE take them up on the offer but don't expect to be paid it. However you should be able to recover it when you finish the contract by taking them to an Employment Tribunal for illegal deductions.

Yes, my solicitor advised that, if the agency does deduct Employer's NI, then I should challenge them in writing when it happens, leave it for a while and then claim via an Employment Tribunal within three months of the final deficient payment.

[lucyclarityumbrella]

Why would anyone choose an umbrella company and suffer three hefty deductions, causing such a large reduction in take-home pay, instead of using agency PAYE? Am I missing something? Why is there a difference in which party funds the employer's NI cost between umbrella company PAYE and agency PAYE? Should I consider any other options?

Because the rates should be different - the umbrella rate would be subject to Employment Costs and the PAYE rate should not be as this would already have been taken and allocated by the agency - hence the rate for the umbrella should be higher. Best way to solve it is to ask what the taxable salary is for both.

[NFH]

If the "three hefty deductions" are the Umbrella's fee, Employer's NI and the apprenticeship levy, you'll be paying the second and third one either way.

No, I won't according to the contract.

If the agency thinks they've got a way of avoiding paying ERNI, I'd stay well away from them...

It's a large reputable agency. They don't claim to have a way of avoiding Employer's NI, and perhaps it is their error. Given that they push everyone to umbrellas (from which they probably get commission), it wouldn't surprise me if there are so few contractors using the agency's PAYE that their procedures for agency PAYE are probably less developed and more error-prone.

[lucyclarityumbrella]

For the same daily rate, the take-home pay figure in the agency's illustration is substantially more than the take-home pay figure in the umbrella's take-home pay figure.

If they really are quoting the same rate then jump at it, but I will bet that when you look further into it the rates are different.

Agency PAYE - should quote taxable salary (ie only subject to Employees NI and PAYE tax)
Umbrella - should be the invoice value (less to ERsNI, Levy and Margin) to reach that taxable salary (then subject to EEsNI and PAYE)

[NFH]

Because the rates should be different - the umbrella rate would be subject to Employment Costs and the PAYE rate should not be as this would already have been taken and allocated by the agency - hence the rate for the umbrella should be higher. Best way to solve it is to ask what the taxable salary is for both.

The daily rate is the same for both, but the take-home pay figure is substantially more for agency PAYE, because the agency doesn't deduct Employer's NI, apprenticeship levy and an admin fee, whereas the umbrellas do.

[eek]

If they really are quoting the same rate then jump at it, but I will bet that when you look further into it the rates are different.

Agency PAYE - should quote taxable salary (ie only subject to Employees NI and PAYE tax)
Umbrella - should be the invoice value (less to ERsNI, Levy and Margin) to reach that taxable salary (then subject to EEsNI and PAYE)

It's almost like someone or other should formally define these things and provide a one stop shop for these documents so agencies don't screw up when asked for them

[lucyclarityumbrella]

The daily rate is the same for both, but the take-home pay figure is substantially less for agency PAYE, because the agency doesn't deduct Employer's NI, apprenticeship levy and an admin fee, whereas the umbrellas do.

I think I know who the agency is - drop me a message if you can and I can talk you through it.
If you want of course