Umbrella, PAYE and IR35: A Recruiter’s Guide to Contractor Pay Models

If you run a temp or contract desk, how your workers get paid is not a back-office detail — it shapes your admin, your margin, your compliance exposure, and what you must disclose to the worker up front. Yet the terminology (PAYE, umbrella, inside/outside IR35) is a genuine source of confusion, and getting the model wrong or misrepresenting it can create real liability. Here is the plain-English version.

This is practical guidance, not tax or legal advice — the off-payroll rules in particular are nuanced and status determinations should be made carefully, with advice where needed.

The three ways a contractor typically gets paid

1. Agency PAYE

The worker is paid through your agency's payroll as a PAYE worker. You deduct income tax and National Insurance at source and pay them net, handling holiday pay and employer obligations. Simplest for the worker to understand; most administrative responsibility on you.

2. Umbrella company

The worker becomes an employee of a third-party umbrella company. The umbrella receives the assignment rate from your agency, runs the worker's payroll, and handles their tax and NI. This shifts payroll admin off your desk, but introduces a party whose deductions the worker needs to understand — and whose conduct you should be comfortable with, since a non-compliant umbrella can create reputational and, increasingly, legal exposure for the agencies that use them.

3. The worker’s own limited company (PSC)

The contractor operates through their own personal service company. This is where IR35 / off-payroll working rules come squarely into play, because the question becomes whether the engagement is genuinely one of self-employment or is really disguised employment.

IR35 / off-payroll: inside vs outside

IR35 exists to stop people who are, in substance, employees from paying less tax by working through a company. The core question for each engagement is its status determination:

• Outside IR35 — the engagement is genuine self-employment. The contractor's company is paid gross and handles its own tax.
• Inside IR35 — the engagement is, in substance, employment. Employment taxes must be deducted, and the tax treatment looks much more like payroll.

Under the off-payroll rules, for many engagements the responsibility for determining status — and often the tax liability if it is got wrong — has shifted onto the client and/or the agency in the chain rather than the contractor. That makes it your business to understand, because "the contractor said they were outside" is not a defence if the determination was unreasonable.

The Key Information Document connection

This is where pay models meet compliance. The Key Information Document must show the worker who pays them, the deductions they will face, and a representative gross-to-net example. If a worker is going via an umbrella, the KID must reflect the umbrella's deductions honestly. Pay-model transparency is not a nicety — it is a documented obligation, and the KID is where it lands.

The admin chain: timesheet to invoice to margin

Whatever the model, the money has to flow: the worker submits hours, those hours are approved, you invoice the client, the worker (or umbrella) is paid, and you need to know your margin on the deal. Each pay model routes that flow slightly differently — different pay recipients, different deductions, different margin arithmetic. Doing this across models by hand, per contractor, per week, is where errors and lost margin creep in.

The takeaway

Pay models are not just the worker's concern — they determine your admin, your margin, your disclosure obligations, and increasingly your liability. Know which model applies, be able to explain its effect on take-home clearly, get IR35 status determinations right, and let your CRM carry the timesheet-to-margin arithmetic so nothing leaks. For the documentation side, see our Reg 15/17 guide; for the workers themselves, Right to Work.