Home > Freelance Contractors > Agency PAYE Schemes

Agency PAYE Schemes

Many freelance contractors source their contracts through a recruitment agency, with many of the large agencies offering a complete contract management package, looking after all elements of your contract placement.

Although this is a very straight forward option, and is attractive to many short term temporary workers; for professional contractors it can be a restrictive and costly way of providing your services.

When working directly through an agency, although you will not be classed as an ‘employee’ of the agency, purely a ‘temporary worker’ with limited employment rights, they have a legal obligation to deduct PAYE and National Insurance on the full amount of your earnings as would an employer. The effect of this is that the agency has to cover the cost of Employers National Insurance, Holiday Pay and administrating the payroll process, which along with their margin, all impacts on the pay rate you will receive from your placement.

Additionally when working directly through an agency, each placement with a client company will be seen as an individual employment, and you will supplied to work under the direction and control of the client, thereby negating the ability to claim tax relief against temporary workplace expenses and any reliefs that would be applicable to an independent contractor.

All in all, for the ‘convenience’ of working directly through an agency on their agency PAYE scheme, you could end up significantly reducing the amount you receive from providing your services on contract.

The Alternatives

Conversely, by choosing to work through an umbrella company, if you will be working under the direction and control of the client therefore inside of the IR35 legislation, or through you own limited company, if you are able to provide you services as an independent contractor outside of IR35, you have the ability to significantly increase your earning potential.

Agencies are not legally obliged to deduct PAYE and NIC’s when paying either an umbrella company or a contractors own limited company, to provide a workers services, therefore they are able to pay the gross amount over, enabling you to maximise your net returns by taking advantage of the many tax breaks applicable to working through these routes.

In addition, because the agency does not have to fund the employment costs applicable to direct supply, many agencies with offer an increased pay rate to contractors working through these alternative routes.

Many umbrella company’s and limited company accountancy service providers, provide bespoke services to contractors to ensure that you are able to provide your services with the minimum of hassle, whilst maximizing your income, which in short, counteracts the convenience factor of using an agency PAYE scheme.

You can read more about umbrella companies and limited company accountants in our articles section, then, take a look at our service provider directories, to find a range of service providers who can help you get the most out of your contracting.