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The Risks of Contractor Loan Schemes

Published: March 29, 2018

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 01295 645 265.

 

 

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Like your illustration?
Speak to us today.

Our dedicated sales team is ready to provide you with a tailored quote, offer guidance on all aspects of the umbrella, or help considering options like a limited company or sole trader.

Whether you prefer to complete the form, or simply give us a call on 01925 645 265, we're here to help

Top-tier protection
Compliance is at the heart of everything we do. FSCA and Cyber Essentials PLUS accredited.
Access to benefits
Enjoy maternity and paternity pay, sick pay, paid annual leave and £20m insurance coverage.
Reliable Service
Quick set-up and same-day payments. Rated Excellent by our umbrella employees.
Expert Support
Decades of experience across multiple industries. Get paid correctly and compliantly.

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