Umbrella, agency or direct: how UK contractors get paid
The same piece of work can be paid three different ways. An umbrella company employs the contractor and runs a payroll. The agency puts them on its own payroll. Or the contractor sends an invoice, as a sole trader or from their own limited company. The day rate can look identical across all three. What changes is who takes off the tax and National Insurance, and who HMRC come to if it isn't paid.
The three routes side by side
| Route | Who runs PAYE | Who else can be on the hook |
|---|---|---|
| Umbrella company | The umbrella, as the worker's employer | The agency that contracts with the client, or the client itself in some chains |
| Agency payroll | The agency that contracts directly with the client, where HMRC's conditions are met | If the agency is outside the UK and contracts directly with a UK client, the client runs it instead |
| Direct, as a sole trader | Nobody. The contractor pays their own tax and National Insurance | Both sides, if the status turns out to be wrong |
| Direct, through their own company | Nobody, unless the off-payroll rules apply and a deemed employer has to deduct | The deemed employer, where the rules apply |
Umbrella: an employer you hire by the hour
An umbrella company employs the contractor and pays them through PAYE. HMRC's Employment Status Manual is plain about it: as the worker's employer, the umbrella has to operate PAYE correctly and pay HMRC the tax and National Insurance due.
What surprises people is the gap between the rate and the payslip. The figure the agency quotes is the assignment rate, sometimes called the umbrella rate or uplifted rate. GOV.UK's umbrella pay tool starts from that number and works out what gross and net pay should be, and which deductions come off on the way. If a contractor can't follow their own pay from the assignment rate down, the tool and the umbrella's reconciliation statement are where to start.
The other change is on the business side. Under the umbrella company rules in Chapter 11 of Part 2 of ITEPA 2003, someone else in the chain is now jointly and severally liable for PAYE the umbrella fails to pay. Usually that's the agency holding the contract with the client. Where the client contracts with the umbrella directly, it's the client. Our guide for agencies covers that exposure in detail.
Agency payroll: the agency steps in as employer for tax
Some agencies pay their workers themselves. HMRC's employer guide, CWG2, says the agency contracting directly with the client runs PAYE and pays both employee's and employer's Class 1 National Insurance when, among other conditions, the worker personally does the work, someone has the right to supervise, direct or control how it's done, and the worker is paid because of it.
There are carve-outs. The agency isn't responsible where the worker works wholly at home, or at premises the client doesn't control (unless the job has to be done there), or works as an entertainer or model, or where the agency only introduced the worker and played no further part.
Direct: invoicing the client
A genuinely self-employed contractor isn't paid through PAYE at all. They invoice, and they're responsible for paying their own tax and National Insurance. GOV.UK warns that if the status is wrong, both sides may face unpaid tax and penalties. Our employed or self-employed test walks through how HMRC look at it.
Through their own limited company, the question becomes the off-payroll working rules, often called IR35. In most cases the client decides whether the worker would be an employee if engaged directly, and gives a status determination statement with its reasons. If the answer is yes, the deemed employer takes off income tax and employee's National Insurance from the fees and pays the employer's National Insurance and any Apprenticeship Levy. For a small client outside the public sector, the contractor's company makes that call instead. Our IR35 guide for overseas engagers covers where a business based outside the UK fits.
If the agency is abroad. CWG2 says that where an agency based outside the UK contracts directly with a UK client, the client deducts the tax and pays the employer's National Insurance. And where an umbrella sits behind a non-UK agency, the Employment Status Manual makes the UK client jointly liable for any PAYE the umbrella doesn't pay. Either way, the risk lands on the business at the UK end.
An illustration
A cork producer from Porto runs a small UK sales office in Stoke-on-Trent and wants a warehouse planner for six months. Three offers come back for broadly the same day rate.
The first is through an agency that uses an umbrella. The planner is the umbrella's employee and gets a payslip, and the agency carries the joint liability for the umbrella's PAYE. The second is on a UK agency's own payroll, so the agency deducts and the office pays the agency's invoice. The third is from the planner's own limited company. The producer is a small business, so it's the planner's company that decides whether IR35 applies. The producer still wants to be comfortable with that answer, because a six-month role in its own warehouse, on its own hours, starts to look like a job.
None of the three is wrong. They put the paperwork, and the risk, in different places.
Travel to the assignment. CWG2 treats each assignment through an employment intermediary, whether an agency, an umbrella or something similar, as a separate employment where the worker is under someone's supervision, direction or control, apart from some excluded services. So the regular trip from home to the assignment is ordinary commuting, and there's no tax relief on it.
Thinking of employing them instead?
When a contractor role turns into a permanent one, the route changes to your own payroll. We run UK payrolls for businesses here and overseas.
Ask us about itCommon questions
Does IR35 apply to someone working through an umbrella company?
GOV.UK says the off-payroll working rules are unlikely to apply if you are employed by an umbrella company. The umbrella is the employer and runs PAYE on your pay.
Who is liable if an umbrella company does not pay the PAYE it owes?
The umbrella company is the employer and must pay it. HMRC's Employment Status Manual makes another party jointly and severally liable as well: the agency that contracts with the client, or the client itself where it contracts directly with the umbrella or uses a non-UK agency.
Can I claim travel to each assignment if I work through an umbrella or agency?
Usually not, where you are under someone's supervision, direction or control. HMRC's employer guide CWG2 treats each assignment through an employment intermediary as a separate employment, so the regular trip to it is ordinary commuting.
Read next
- Umbrella PAYE changes from April 2026: what agencies must do
- Do umbrella and agency contractors need to file a tax return?
- Off-payroll working (IR35) for overseas engagers
- Hiring a UK contractor versus a UK employee
- Employed or self-employed? The test HMRC actually applies
General information, not tax or legal advice. It reflects GOV.UK guidance, HMRC's Employment Status Manual and the employer guide CWG2 for 2026/27 as read on 2 November 2026, which can change. Please check your own position before acting.