The Risks of Contractor Loan Schemes

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For contractors looking for a competitive rate of take-home pay, these loans can be appealing. However, what initially looks like an attractive prospect could end up costing you more money and hassle than anticipated. Contractor loan schemes sprang up and turned the heads of a number of self-employed workers looking for a more competitive rate of take-home pay.

As compliance is our top priority at Parasol, we’ve put some information together to make sure you’re not caught by a loan scheme.

What is a contractor loan scheme?

Contractor loans schemes – also known as disguised remuneration schemes – are designed to avoid the need to pay tax. The scheme pays contractors a small portion of their salary as a PAYE income and the rest is paid in the form of a loan which would not be subject to tax or National Insurance contributions.

This payment will usually be made from a chain of third-party partnerships instead of from the company directly. The amount paid is usually enough to meet National Minimum Wage requirements

How to spot loan schemes

Loan schemes generally worked by advertising to contractors that they could keep up to 90% of their take-home pay.

If the scheme is advertising itself based on its approval by HMRC, this is also false. HMRC will never approve of any scheme. Contractor loan schemes must be declared to HMRC, so you should be wary of any company who informs you that you don’t need to tell them.

You can find more about how to spot a scheme on HMRC’s website.

What could happen if you use a loan scheme?

Once the loan was written off by the company or employer, you would be liable to pay the full amount of tax back. If the loan was not written off you would be liable for the full sum of money.

If HMRC rules that you’re guilty of tax avoidance (even unknowingly), the penalties can be severe. You may be liable for the full tax amount upfront and any Inheritance Tax charges if the loan was paid through a trust.

Why choose Parasol?

Choosing an employment solution that works for you is crucial to your contracting career. And Parasol is regulated by a number of governing bodies so you know you’re in safe hands.

If you’re concerned about your current company, you can talk to our team for further advice on 0800 464 0631.