When paying a candidate via an Umbrella (or Limited Company), the pay rate that is agreed and paid over includes all the costs of the candidate. However, if a candidate is paid via the agency PAYE scheme, then the agency has several costs based on the candidate’s pay rate that need to be considered to ascertain the true cost of the candidate. This means that even if on the face of it, the candidate being paid via an umbrella company appears to be paid a higher amount, the umbrella company will deduct the costs from the amount received before paying the candidate. So when it comes to PAYE contractor rates – how do you calculate the true contractor cost?

The breakdown of the true cost of a worker being paid under an agency PAYE scheme is as follows: –


The candidate pay rate is the amount agreed to be paid to the candidate and this amount will be shown on the PAYE payslip multiplied by the number of hours/days worked.


PAYE workers are entitled to holiday pay from their employer (which would be the recruitment agency) and is based on the number of entitled holiday days.  The UK standard holiday allowance is 20 working days plus 8 days of bank holidays.  However, when completing due diligence with the client it is advisable (under AWR) that the agency pays the candidates the same entitlement as full-time permanent employees of the client.  The calculation of working out the holiday pay percentage to be charged is: –

  • 260 working days minus Holiday Days Allowable = Number of Working Days
    • Holiday Days Allowable divided by Number of Working Days x 100 = Holiday Pay Percentage
    • Candidate Pay Rate x Holiday Pay Percentage = Holiday Pay

For example,

  • 260 minus 28 = 232 days
    • 28/232 x 100 = 12.07%

Some agencies will pay rolled-up holiday pay (i.e. pay the holiday pay as the candidate accrues it) but the contract and the payslip need to be very clear and breakdown the candidate pay rate and the holiday pay amounts paid.


In October 2012, the government introduced the Auto-Enrolment Pension scheme where all employees opted into a company pension scheme. Over the years, this has been rolled out to all employers and the rates are now set that companies must contribute 3% of salary into a scheme if the employee also contributes.  This scheme also applies to PAYE contract workers on the recruitment agency payroll. The calculation of working out the pension contribution to be charged is: –

  • (Candidate Pay Rate + Holiday Pay) x 3% = Employer Pension Contribution

Even if the candidate has decided to not opt into the pension scheme you are still entitled to include this within the charge rate in case the candidate chooses to opt in later. If the candidate has opted out, then the agency could make additional profit on the pension contributions that are not paid.


All UK employers must pay Employers National Insurance on PAYE workers running through payroll at a rate of 13.8% of salary. There is an allowance per employee that could be considered but as a candidate may have multiple rates or work at multiple sites this is often not used as part of the calculation. The calculation of working out the Employers National Insurance is: –

  • (Candidate Pay Rate + Holiday Pay) x 13.8% = Employer National Insurance Contribution

As the Employers allowance is not considered within the calculation the agency may make a small amount of additional profit on PAYE candidates


Once all the above calculations have been completed, to get the true cost of the candidate running through the agency PAYE scheme is: –

  • Candidate Pay Rate + Holiday Pay + Employer Pension Contribution + Employers National Insurance Contribution = True Cost of PAYE Candidate

The true cost of the candidate should also be the same amount paid to Umbrella companies for candidates doing the same position.

Once the true cost of the candidate has been calculated the agency can then add their profit margin to then get the charge rate to the client.

Whilst the process of completing all the above calculations per placement can seem very cumbersome, paying candidates via the agency PAYE scheme can aid company cashflow and give the clients the peace of mind that the candidate has been taxed and paid correctly.

MAYACHI can help recruitment agencies who are considering running an agency PAYE scheme for their temporary/contract workers including providing PAYE Rate calculators and ensuring that the candidate compliance has been conducted correctly. Contact us today and make sure you’re following us on LinkedIn!

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