Advantages Of Running An Internal Paye Scheme For Your Recruitment Agency

Due to the new IR35 Legislation for Public Sector Workers that is coming into effect on the 6th April 2017 and the changes to expenses allowances for contractors using Umbrella companies over the past few years, the way that candidates are being paid has changed and agencies have had to decide on the best way to administer this in order to remain compliant.  The legislation changes have meant that candidates have moved from Umbrella companies to Limited Companies and now may have to move back to umbrella companies or decide to go PAYE through the agencies books.  Most agency directors believe that running a PAYE scheme is complex and arduous, seeing it as easier each week to pay funds to an umbrella/limited company and task them with paying the candidates.

However, TBOS has different views on running an internal PAYE for contractors and staff as there are many advantages to doing this process in-house:-


When making a payment for a umbrella/limited company invoice, this will include a number of separate factors that make up the payment – the candidates salary, the candidates holiday pay, the employers NI contribution, pension contributions and VAT.  When these funds are paid to the umbrella/limited company, they will withhold the appropriate amounts in their bank account and make the payments when required.  If the agency runs the PAYE scheme themselves for the contractors there is no VAT required to be paid over, the holiday pay is held until the candidate actually goes on holiday and the PAYE (Tax, Employers and Employees NI, Student Loan, etc.) is held until the 22nd of the following month.  All of the funds that are held by the agency aid the cash-flow and in some cases we have actually seen this reduce or eliminate the need for invoice finance/funding.


When making a payment to an umbrella/limited company, the invoice is calculated at a rate which includes Employers NI at 13.8% as a full chargeable cost. However, when an agency runs the PAYE scheme themselves for the contractors, the weekly allowance of £156 before Employers NI is calculated is taken into account.  If the candidate earns over £156 during that week then the agency could make an additional profit of £21.54 (13.8% of £156) per week, which for 10 contractors could mean £215.40 per month or £932.68 per month.


Running payroll has always appeared to be a mystical art that can only be done by trained payroll professionals or accountants who understand the complex calculations. However, due to advances in payroll software and the information on taxation being freely available online, this has allowed any agency to process their own internal payroll for their staff and the contractors.  In most cases, if the agency is using an invoicing system to raise the client invoices and calculate the candidates pay, there are often links to payroll software such as Sage Payroll which makes the process even easier to manage.


One of the most important parts of running a contract/temp book is to ensure that the candidates are paid on time.  If a candidate is paid late or not at all, this can have a detrimental effect on the placement, the client and even future placements.  When an agency pays to an umbrella/limited company, there is always the risk of the candidate not being paid and in some cases we have seen some agencies pay funds to these companies earlier to ensure the candidates are paid on time to the detriment of the agency cash-flow.  If the candidate is paid PAYE by the agency then they have more control over when the candidate is and can make earlier payments should it be required.

TBOS currently looks after the PAYE schemes for a large number of agencies, running staff payroll and in some cases also contractor PAYE payroll.  This includes running small monthly payrolls or large temp PAYE schemes with hundreds of weekly candidates.  In many circumstances it has been proven that running a PAYE scheme for the contractors has meant that the agencies managed to reduce their invoice finance funding or in some circumstances even eliminate the need for a funding facility by using the VAT, PAYE and holiday pay as a cash-flow aid.

If you would like to find out how TBOS can help provide an internal PAYE scheme for your  contractors, please contact our office.

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