Umbrella payroll vs PAYE: what's the difference?
Both pay workers through PAYE. The difference is who the employer is, and that changes costs, rights and responsibilities.
Umbrella payroll and direct PAYE both deduct income tax and National Insurance before the worker is paid. What differs is who employs the worker: an umbrella company, or the agency or business itself.
The short answer
| Umbrella payroll | Direct PAYE | |
|---|---|---|
| Employer | The umbrella company | The agency or business |
| Who runs payroll | The umbrella company | The employer, or a bureau on its behalf |
| Employer costs | Paid by the umbrella from the assignment rate | Paid by the employer on top of pay |
| Usually suits | Contractors moving between agency assignments | Long-term temps and permanent staff |
How umbrella payroll works
The agency pays the umbrella company an assignment rate. The umbrella takes its margin and the employer costs, such as employer National Insurance at 15% above £96 a week in 2026/27, then works out the worker's gross pay and deducts tax and National Insurance. Our payslip guide walks through a full example.
How direct PAYE works
The agency or business employs the worker directly. It pays gross wages, deducts tax and National Insurance, and pays employer National Insurance and pension contributions on top. It can run the payroll itself or outsource it.
Which is right?
- Choose umbrella when the agency does not want to be the employer and the worker moves between assignments.
- Choose direct PAYE when the agency wants to employ its temps, or the worker is staying long term.
For worked examples, see PAYE vs umbrella: examples for agencies and contractors.
Frequently asked questions
Is umbrella pay taxed differently from PAYE?
No. Umbrella workers are paid through PAYE too. The difference is that employer costs come out of the assignment rate before gross pay is calculated.
Do umbrella workers get employment rights?
Yes. They are employees of the umbrella company, with rights such as holiday pay and statutory sick pay.
Need help with this? Our payroll and compliance team can talk it through with you. Talk to our team.
Last reviewed 9 October 2026. General information, not legal or tax advice.