If you’ve been offered a placement through an agency, someone has probably already asked how you want to be paid. The options can seem complicated, but they don’t have to be.
This guide walks through each model in plain English – how it works, what it means for your tax and take-home, and who it tends to suit. By the end, you should have a clear enough picture to make the right call for your situation.
Agency PAYE: the simplest setup
Agency PAYE means you’re paid directly by the recruitment agency or, in some cases, the end client. Tax and National Insurance (NI) are deducted automatically before your money reaches you, just as they would be in a permanent job. There’s no third party involved, you receive a payslip and you don’t need to set anything up.
This tends to suit contractors who are new to contracting and want to keep things simple, or those on short placements where setting up a separate arrangement isn’t worth it. It’s also common in sectors such as education and social care, where most roles are structured this way.
The main limitation is flexibility. You’re taxed at the standard PAYE rate with no scope to structure your pay differently, which can mean a lower take-home than other models. The difference depends on your rate and your wider tax position. Employment rights also vary by contract, so check what your agency actually provides.
Umbrella employment: how it works in plain language
An umbrella company employs you on a PAYE basis and sits between you and the recruitment agency. The agency pays the umbrella an assignment rate that covers your pay plus employer costs. The umbrella deducts employer’s NI, pension contributions and its own margin, then processes your gross salary. Your employee’s NI and income tax come out, and the remainder lands in your account with a clear, itemised payslip.
You don’t need an accountant. You don’t need to file a self-assessment tax return (unless you have other income). And because you’re employed, you have proper employment rights: statutory sick pay, statutory maternity or paternity pay, auto-enrolment pension contributions and at least 28 days’ paid holiday pro rata.
Understanding your pay
The rate your agency quotes – often called the assignment rate – is not your take-home. Ask your umbrella for a breakdown before you commit, so you can see exactly what each deduction covers. A good umbrella company makes this straightforward. If one can’t explain every line on your payslip, look elsewhere.
What to check when choosing an umbrella
- FCSA accreditation. The Freelancer and Contractor Services Association (FCSA) is the industry’s main compliance body. FCSA-accredited umbrellas commit to operating transparently and legally.
- SafeRec auditing. SafeRec independently checks every payroll run in real time, giving you confidence that what’s deducted from your pay is actually reaching HMRC.
- Real reviews. Check Trustpilot or Google. Pay attention to what contractors say about pay accuracy and how quickly queries are resolved – not just the headline rating.
- Accessible support. You’ll have questions at some point. Make sure you can reach a real person quickly, by phone, email or WhatsApp.
According to Sapphire’s 2025 Contractor Census, 75% of contractors said clear, detailed payslips were the most important factor when choosing an umbrella. Reliable, rapid payment and access to customer support were each cited by 43%. Transparency matters more to most contractors than almost anything else.
Limited company (PSC): more control, more responsibility
Operating through your own limited company – often called a Personal Service Company, or PSC – gives you more flexibility over how you pay yourself. As a director, you typically take a combination of salary and dividends, which can be more tax-efficient than PAYE. The company receives the contract income, pays corporation tax on its profits, and you draw money out accordingly.
This tends to make sense if you’re an experienced contractor, your contract is outside IR35, you expect to be contracting for a sustained period and you’re comfortable managing a bit of admin.
IR35: the key risk to understand
IR35 is tax legislation designed to prevent contractors using a limited company to reduce their tax bill when they’re working in a way that closely resembles employment. If your contract falls inside IR35, you’ll be taxed broadly as an employee and the tax benefit of the limited company largely disappears.
Since 2021, most medium and large end clients have been responsible for making the IR35 determination. According to the 2025 Contractor Census, 42% of recruiters report that more roles are now being determined inside IR35. If your role is inside IR35, umbrella is usually the simpler option.
Running through a limited company means registering at Companies House, filing annual accounts and confirmation statements, submitting a self-assessment tax return and managing corporation tax payments. Most contractors use an accountant. The admin is manageable, but it’s real.
How to choose: the right questions for your situation
There’s no single right answer – it depends on where you are in your contracting career and what your contract looks like. These questions cut through the noise:
Are you new to contracting? Umbrella is usually the easiest starting point. Tax is handled for you, there’s nothing to set up and you can always move to a limited company later.
Is your contract inside or outside IR35? Inside IR35, a limited company won’t deliver the tax advantages you might expect. Umbrella is typically the better fit. Outside IR35, it’s worth talking to an accountant about whether the maths makes sense.
How long is the contract? For short assignments, the cost and effort of setting up a limited company rarely pay off. For longer-term contracts – particularly outside IR35 – it may.
How much admin do you want? Umbrella: almost none. Agency PAYE: none. Limited company: more – filing deadlines, accounts, tax payments.
Do employment rights matter to you? Statutory sick pay, holiday pay and auto-enrolment pension: umbrella provides all of them as standard.
What Sapphire offers
Sapphire provides umbrella payroll and limited company accounting support for contractors.
Umbrella payroll: Sapphire employs contractors on a PAYE basis and has held FCSA accreditation for eight consecutive years. SafeRec real-time auditing runs on every payroll, giving independent verification that your deductions are reaching HMRC. Payslips are clear and itemised. The team is reachable by phone, email or WhatsApp, with 98% of emails answered the same day. Sapphire holds a 4.9 Trustpilot rating from more than 5,000 reviews and has supported more than 100,000 contractors.
Sapphire has been employee-owned since 2021. Qualifying contractors who’ve worked with Sapphire for over a year can receive a share of company profits through the contractor bonus programme – more than £1m has been paid out to contractors to date.
Limited company accounting: Sapphire’s accounting team helps contractors with company accounts, tax filings and IR35 guidance – the ongoing support that makes running a PSC straightforward rather than stressful.
Use Sapphire’s take-home pay calculator to get a picture of your expected pay before committing to a model [link to calculator]
Not sure yet? Speak to someone
If you’re still uncertain, the most useful thing you can do is speak to someone who can explain your options without steering you towards a particular one.
The right model depends on your contract, your IR35 status, how long you’re contracting and what matters most to you. A short conversation can clear up a lot.
Get in touch [link] with the Sapphire team by phone, email or WhatsApp.
Frequently asked questions
Can I switch between umbrella and limited company later?
Yes. Many contractors start on umbrella and move to a limited company once they’ve got a feel for contracting – or switch back if their IR35 status changes. There are some admin steps involved, so it’s worth planning ahead rather than switching mid-assignment.
Does the umbrella company take money from my pay?
The umbrella charges a margin, but this comes from the overall assignment rate paid by the agency – not as an additional deduction from your agreed pay. Before you sign up, ask for a clear breakdown of the assignment rate and your expected take-home.
What is the FCSA and why does it matter?
The Freelancer and Contractor Services Association is the main accreditation body for umbrella companies. FCSA-accredited providers commit to a code of conduct covering transparency, compliance and fair treatment of contractors. It’s one of the clearest signals that a provider is operating within the rules.
Who determines whether my contract is inside or outside IR35?
For contracts with medium or large end clients, the end client makes the determination. For small companies, the contractor is responsible. Your recruitment agency can usually confirm the IR35 status of your role before you start.
