Increasing take home pay is on the mind of most contractors and if your agency or umbrella company offers to increase your income by reducing your tax liabilities, it’s hard to see this as a negative.
However, there is actually reason to be sceptical of such promises. A recently published report by HMRC, Spotlight 45, has shed light upon a number of schemes which are advertised as saving umbrella employees money. But in actual fact, they can end up costing contractors more money and put them at risk of tax avoidance.
The spotlight report warns of the dangers contractors could face when entering into such schemes, such as leaving themselves liable for their own tax and National Insurance and in the worst cases, severe financial penalties.
How do these arrangements work?
Although there isn’t a one size fits all, these schemes generally offer their workers a higher rate of take home pay and help reduce your tax and paperwork responsibilities. These companies will tell you that a payment made does not count as taxable income as it is a loan, a credit or an investment.
These arrangements can vary, but they will usually follow the same steps:
- You will be paid a small salary from the company with tax and National Insurance deducted.
- You will then receive a larger payment without tax and National Insurance deductions. This payment may arrive from a different account than the first, sometimes from overseas. Your payslip will outline this sum of money as something other than salary (a loan, for example) and will have no contributions deducted.
Spotlight 45 outlines a few key factors which can help you determine that a scheme is illegitimate:
- The company promises that you can keep 80, 90 or 95% of your wages and remain compliant.
- A small portion of your salary is paid through payroll and subject to PAYE.
- The company claims that it isn’t liable for tax and National Insurance contributions.
- The payment from your umbrella company passes through a string of other parties before it reaches you.
If you are involved in a scheme like this, it is highly likely that you will be considered as avoiding tax and will, therefore, be liable to pay greater tax and National Insurance contributions. In some extreme situations, you may also be faced with financial penalties.
How to tell your umbrella company is legitimate
Any legitimate umbrella company will never offer the promise of increased take home pay or reduced tax liabilities so you should be wary of a company that makes these claims.
A trustworthy company should have a long-standing history with a solid reputation within the industry. Here at Parasol, we’re fully accredited with industry bodies such as APSCo and an associate member of the FCSA, meaning compliance is always our number one consideration. We fully support the measures set out by HMRC to shine light on bad practices in the Umbrella industry.
Find out more
At Parasol, we understand that the right support from your umbrella company is vital to your success. With over eighteen years’ experience, we pride ourselves on knowing all the relevant legislation inside out.
If you have any questions about your current umbrella company and their working practices, our Best Advice team are here to help. For any help and advice, simply send us a message and we’ll be in touch.