PSC or umbrella: how are contractors engaged in the UK?
A PSC is a personal service company, a limited company the contractor owns and invoices through. An umbrella company instead employs the contractor and runs them through PAYE, deducting tax before paying them. The choice is usually driven by IR35 status: outside-IR35 work tends to run through a PSC, inside-IR35 work through an umbrella or agency payroll.
In a PSC arrangement the contractor is a supplier. Their limited company invoices the agency, the agency pays it gross, and the contractor handles their own tax. Administratively this is the lighter of the two, and it is the model most contract desks placing specialist professionals will recognise.
An umbrella company sits between the agency and the contractor as an employer. The agency pays the umbrella, the umbrella runs PAYE and passes on net pay. The contractor gets employment rights and a payslip, and the agency is not running payroll itself.
What decides the route is usually IR35. Since the 2021 reforms in the private sector, the end client determines whether an engagement is inside or outside the rules, and where the client is medium or large the liability sits with the fee payer. An inside-IR35 determination effectively rules out paying a PSC gross.
Worth saying plainly where we sit: Vayora supports contractors engaged through their own limited company. Umbrella arrangements and agency PAYE payroll are not what the finance engine does today, and an agency whose desk depends on them should know that before a demo rather than after.
How do PSC, umbrella and inside-IR35 PSC engagements compare?
There are really three routes, because a limited company contractor can also be engaged inside IR35, with deductions made before the PSC is paid.
| Item | PSC, outside IR35 | PSC, inside IR35 | Umbrella company |
|---|---|---|---|
| Who employs the contractor | Nobody; they run their own company | Nobody; treated as employed for tax only | The umbrella company |
| Who the agency pays | The contractor's limited company, gross | The limited company, after deductions | The umbrella, which pays the worker through PAYE |
| Who deducts tax and NICs | The contractor's company, on its own account | The fee payer, usually the agency | The umbrella, with the agency now responsible for it being done correctly |
| Employer NICs and Apprenticeship Levy | Not due from the agency | Paid by the fee payer | Paid by the umbrella from the assignment rate |
| Employment rights | None as an employee | None as an employee | Yes, as the umbrella's employee |
| Agency admin | Lightest: invoices on both sides | Heaviest: payroll-style deductions and reporting | Moderate: due diligence on the umbrella |
Who decides whether a contract is inside or outside IR35?
Since April 2021, a medium or large private sector client decides, as do all public sector clients. The client must issue a status determination statement that gives its conclusion and the reasons for it, and it must take reasonable care in reaching it. If it fails to give reasons or take reasonable care, HMRC's guidance says the client can become liable for the tax.
Small private sector clients are exempt, and the contractor's own company decides status instead. From 6 April 2025 a company counts as small if it meets two of three tests: turnover of £15 million or less, a balance sheet of £7.5 million or less, and 50 employees or fewer. Because size is judged on past financial years, the new thresholds take time to affect which clients are in scope.
The contractor or the fee payer can dispute a determination. The client then has 45 days to respond, either confirming it with reasons or issuing a new one.
What does the agency do when a role is determined inside IR35?
If the agency is the fee payer and pays a PSC for inside-IR35 work, it must treat that payment as a deemed employment payment: deduct income tax and employee National Insurance, pay employer National Insurance and, where it applies, the Apprenticeship Levy, and report it through its own payroll. The contractor's company receives what is left.
In practice many agencies prefer not to run that themselves, and either route inside-IR35 contractors through an umbrella or decline the work. Whichever route you take, the rate conversation changes: the client's day rate now has to absorb employer costs, so a rate that worked outside IR35 will leave the contractor noticeably worse off inside it.
What changed for umbrella companies in April 2026?
From 6 April 2026, GOV.UK guidance says the agency that contracts with the end client is responsible for making sure PAYE is operated correctly when an umbrella company employs its workers, and HMRC can recover any underpayment from that agency. Where no agency is involved, the end client carries it. The umbrella still runs the payroll day to day.
The effect is that choosing an umbrella is no longer a way of handing the risk to someone else. An agency using a non-compliant umbrella is now exposed to that umbrella's unpaid tax, which makes the choice of provider a finance decision rather than a convenience.
How should an agency check an umbrella company?
Accreditation badges help, but they are not a substitute for checking what the umbrella actually does with the money.
- Ask for sample payslips and check that the whole assignment rate is accounted for, with tax and NICs deducted from the full pay.
- Treat promised take-home pay that looks unusually high, loans, or pay split into untaxed allowances as red flags.
- Check the key information document the worker receives before starting explains the deductions clearly.
- Keep a record of the checks, repeat them periodically, and set a rule for what happens if an umbrella fails one.
- Read HMRC's GOV.UK guidance for agencies on reducing the risk of using a non-compliant umbrella.
Where Vayora fits
Vayora's contract finance runs the outside-IR35 limited company route: client invoices, self-billed invoices to the contractor's company and pay runs. Roles can record an IR35 status, but Vayora does not store status determination statements, make inside-IR35 deductions, or invoice umbrellas and run PAYE. If a large part of your book is inside IR35, you would need a separate payroll or umbrella process alongside it.
Common questions
- Does IR35 apply to public sector clients of any size?
- Yes. The small client exemption only exists in the private sector. Every public sector body has decided the status of contractors it engages through intermediaries since April 2017, and it must issue a status determination statement with reasons, just as a medium or large private sector client has had to since April 2021.
- Can a contractor switch from their PSC to an umbrella mid-contract?
- Yes, but it needs a new contractual chain: the agency contracts with the umbrella instead of the PSC, and the umbrella employs the contractor. Agree an end date for the old arrangement so no period is paid twice, restart onboarding with the umbrella, and recheck that the rate still works once employer costs come out of it.
- Is a sole trader the same as a PSC for IR35?
- No. The off-payroll rules apply where a worker provides services through an intermediary, usually their own limited company. A sole trader has no intermediary, so the question is instead whether they are self-employed or an employee for tax in the ordinary way. Many agencies simply do not engage sole traders for this reason.
- Who pays employer National Insurance on an inside-IR35 PSC contract?
- The fee payer, which is the party in the chain that pays the contractor's company, usually the agency. It pays employer National Insurance, and the Apprenticeship Levy where due, on top of deducting income tax and employee National Insurance. That cost is normally built into the charge rate rather than taken from the contractor's pay.