When an agency pays a temporary, contract or interim worker, there are three main ways this can be done. Either via the candidate's own limited company, via an umbrella company, or under the agency's PAYE scheme (depending on their IR35 status determination.

With the new IR35 legislation within the private sector on the 6th April 2021 (which has already been in place for the public sector since 6th April 2017), there is a much larger call for agencies to consider running the contractors via the agency payroll due to cash-flow advantages and more control over the payments to the candidates.

However, the agency needs to understand the true cost of a candidate who is being paid via the agency PAYE scheme compared to being paid via an umbrella company to ensure that the cost to the agency is the same.

The agency should ensure that the cost to the agency is the same for PAYE candidates and umbrella company contractors by taking into account the additional elements that make up PAYE candidates costs, which are already included in the Umbrella Company Pay Rate.

In order to understand the true cost of a PAYE candidate so it matches the cost of an Umbrella Company contractor, you need to run the following calculations: -


This is the rate you will be paying the candidate per day/per hour, which will show on their payslip. This will need to be at least to or higher than the National Minimum Wage and will form the basis of the calculations.


Every PAYE candidate is entitled to be auto-enrolled on the agency pension scheme, which means that the agency and the candidate need to contribute towards the scheme (unless they decide to opt out). 

Therefore, you need to account for this cost when calculating the candidate's cost. Employers have to currently contribute 3% of salary towards a pension scheme, so you need to work out 3% of the pay rate to the candidate as the first calculation.


PAYE candidates are entitled to holiday pay under the PAYE scheme and are entitled to a minimum of 28 days holiday per annum (20 days holiday plus 8 Bank Holiday days). Some clients will allow their contractors a higher holiday allowance, so this must be checked when completing your AWR checks. If the candidate is entitled to 28 days holiday, then the calculation would be 12.07% of the Candidate Pay Rate plus the Pension Cost. If the candidate is entitled to additional holiday days, then the holiday pay percentage will increase based on a calculation of the holiday days divided by the number of remaining working days of the year (based on 260 working days of the year). The holiday pay can be withheld by the agency until the candidate takes holiday, or it can be paid as it is accrued each week/month. However, if the holiday is paid as it is accrued, it must be broken down on the payslip to comply with the Good Work Plan.


The last cost to the agency is the Employers National Insurance contribution which is due to HMRC. Although there is a weekly allowance before Employers National Insurance is due, this cannot be factored into the candidate cost calculation as it is unknown how many hours each week/month the candidate will be working, so it is best to calculate it without the allowance included. This is done by taking the Candidate Pay Rate plus the Holiday Pay and multiplying the total by 13.8%. This does mean that the agency could potentially make additional profit based on 13.8% of the Employers National Insurance allowance.


Once you have completed each of the above calculations and you add the Candidate Pay rate, the pension contribution, the holiday pay and the Employers NI, this will give you the total cost of the PAYE candidate that will be reflected on your accounts. This should be the same rate that you also pay the Umbrella Company as they will take into account the holiday pay, pension and Employers NI from the amount the agency pays before calculating the candidate's take-home pay.

The most important thing to remember is that a candidate using the agency PAYE scheme will always be paid at a lower pay rate than an Umbrella Company contractor, but the cost to the agency will be the same. There is also very little difference in the take-home pay between a candidate working via the agency PAYE scheme and an Umbrella Company.

Whereas this article has shown the calculation if you know the amount you are paying the candidate under the PAYE scheme, if you know the umbrella company cost and you want to know the PAYE pay rate, then you will have to work the calculations back the other way taking each step into account.


TBOS runs candidate PAYE schemes for many of its recruitment agency clients and ensures that the agency completes the correct calculations to understand the true cost of the candidate. 

TBOS provides its agencies with calculators they can use when speaking to their candidates so they can give this choice to the candidates at an early stage.

For more information on how TBOS can help manage your agency PAYE scheme or back office processes, please contact our office.

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