When it comes to working in the healthcare sector, understanding your employment options is crucial. The choice between PAYE vs umbrella employment can have a significant impact on your take-home pay, tax obligations, and overall job satisfaction. For medical professionals seeking flexibility and financial clarity, grasping the key differences between these two models is essential.

In this article, we'll break down the fundamentals of PAYE and umbrella employment. We'll compare their pay structures, explore the benefits and considerations of each option, and provide you with the information you need to make the right choice for your career. Whether you're a locum doctor, agency nurse, or allied health professional, this guide will help you navigate the complexities of employment models in the medical field.

Understanding PAYE and Umbrella Employment

What is PAYE?

PAYE, which stands for Pay As You Earn, is HMRC's system for collecting income tax and National Insurance contributions (NICs) from employees' pay. This method spreads an employee's tax liability over the tax year, which runs from 6 April to 5 April the following year. Under PAYE, employers deduct tax and NICs from most payments made to employees before paying their wages.

The PAYE system uses tax codes to calculate the amount of tax to deduct from an employee's pay. It's important to note that PAYE is an estimate of the tax an employee should pay based on HMRC's understanding of their income and personal circumstances, rather than an exact measurement of their tax liability.

For the 2025/26 tax year, employees do not pay NICs on earnings up to £242 per week (£1,048 per month). However, between the lower earnings limit of £123 per week (£533 per month) and the primary threshold, employees are treated as if they have paid NICs, which helps protect their entitlement to state pension and other benefits.

What is an Umbrella Company?

An umbrella company acts as an intermediary between contractors and their end clients or agencies. It serves as the employer for contractors, handling administrative tasks such as invoicing, tax deductions, and payroll. Contractors become employees of the umbrella company, enjoying a simplified process without the administrative burdens associated with running their own limited company.

Umbrella companies have been around for almost 20 years, and it's estimated that over 400,000 contractors and freelancers in the UK are paid through them. They process the payroll of temporary workers using PAYE and are responsible for deducting the correct tax and NICs, which are sent directly to HMRC.

When you join an umbrella company, you'll need to register with them, usually by completing an online form or over the phone. You'll be required to provide proof of identity, right to work in the UK, and a P45 (or Right to Work document if you don't have one). Once registered, you sign an employment contract between yourself (the employee) and the umbrella company (the employer).

Key Differences at a Glance

Understanding these key differences can help you make an informed decision about which employment model best suits your needs as a contractor or temporary worker in the healthcare sector.

Comparing Pay Structures

Assignment Rates and Taxable Salary

When working through an umbrella company, you'll encounter the term "assignment rate." This rate is not your actual take-home pay but rather the amount invoiced to the agency or end client. It's important to note that this figure includes employment costs, which are not typically visible in a standard PAYE arrangement.

The assignment rate comprises your gross pay, the umbrella company's fees (or margin), and employment costs. These employment costs include Employer National Insurance Contributions, the Apprenticeship Levy, and sometimes employer pension contributions. As a result, the assignment rate is usually higher than what you'd see in a PAYE position to accommodate these additional expenses.

In contrast, with agency PAYE, the rate you're offered is generally lower because it's already adjusted for employment costs. This rate is considered your taxable salary and is similar to what you'd see in standard employment.

Employment Costs and Deductions

For umbrella company employees, several deductions are made from the assignment rate before arriving at the taxable salary. These include:
• Employer's National Insurance Contributions (typically 13.8%)
• Apprenticeship Levy (0.5%)
• Umbrella company margin (usually between £15 and £25 per week)

After these deductions, you're left with your taxable salary. From this amount, further deductions are made, including:
• Income Tax
• Employee National Insurance Contributions
• Pension contributions (if applicable)
• Student loan repayments (if applicable)

With agency PAYE, the process is more straightforward. The agency handles the payroll, ensuring that PAYE and NIC contributions are deducted before issuing your payslip. The rate you're given is your taxable salary, and deductions are made directly from this amount.

Benefits and Considerations

Holiday Pay and Pensions

One significant benefit of working through an umbrella company is your entitlement to statutory payments. As an umbrella company contractor, you're entitled to 28 days' holiday (or 'annual leave') per year. This equates to approximately 5.6 working weeks, leaving you with a total working year of 46.4 weeks.

Your holiday pay is calculated at 12.07% of your gross salary payment. This figure is derived by dividing 5.6 weeks by the remaining 46.4 weeks in the year. It's important to note that your holiday pay is deducted from the contract rate that the umbrella receives from the recruitment agency or end client, not your hourly rate.

There are two main methods for receiving holiday pay from an umbrella company:
• The accrual method: Your accumulated holiday payment is held until you need or request it. This pot of money is then paid to you when you choose to take annual leave, your assignment has finished, or at the end of the financial year.
• The 'paid in advance' method: You receive a small percentage of your holiday pay within your weekly or monthly PAYE payments. This means you get your holiday payments in advance based on your hours worked in the payment period.

Regarding pensions, umbrella companies often support contributions into your personal pension through a salary sacrifice arrangement. This allows you to maintain one pension pot across all of your assignments, providing continuity and simplifying your retirement planning.

Flexibility and Convenience

Umbrella employment offers significant flexibility and convenience for contractors. You can take on different contracts with various clients while the umbrella company handles all the paperwork. This arrangement is particularly beneficial for those new to contracting or those who prefer short-term assignments.

The administrative simplicity provided by umbrella companies is a major advantage. They take care of tasks such as invoicing, payroll, and tax calculations, allowing you to focus on your work without the burden of administrative responsibilities. This can be especially appealing if you value your time and prefer to concentrate on your professional duties rather than paperwork.

Moreover, umbrella companies offer support and guidance to contractors, addressing queries related to tax, employment, and other relevant matters. This assistance can be invaluable in navigating the complexities of contracting, especially for those new to this type of work arrangement.

Additional Perks and Services

Umbrella companies often provide a range of additional perks and services that can enhance your overall employment experience. These may include:
• Access to comprehensive insurance packages, including employers' liability, public liability, and professional indemnity coverage. This ensures you're protected while carrying out your professional duties.
• Employee rewards schemes, which can offer various benefits and discounts.
• Access to statutory sick pay, maternity, paternity, or adoption pay, and bereavement leave.
• Some umbrella companies offer access to online GP services or personal accident cover at discounted prices.
• Allowable business expenses claims (if applicable to your situation).

It's worth noting that these additional perks can vary between umbrella companies, so it's essential to carefully review their offerings when making your decision.

Conclusion: Making the Right Choice for Your Career

Choosing between PAYE and umbrella employment has a significant impact on your career in the healthcare sector. Both options come with their own set of advantages and considerations, ranging from tax implications to administrative responsibilities. The right choice depends on your personal circumstances, career goals, and preferences regarding employment benefits and financial management.

To make an informed decision, it's crucial to weigh up the pros and cons of each option carefully. Consider factors such as your desired level of flexibility, your comfort with handling administrative tasks, and your long-term career plans. Remember, what works best for one healthcare professional might not be the ideal choice for another. So, take the time to reflect on your unique situation and don't hesitate to seek advice from financial experts or fellow professionals in the field.