HMRC has published a new tax Spotlight: ‘Umbrella companies offering to increase your take home pay’. It highlights the fact that many employees and self employed contractors are failing to realise that some staff agencies and umbrella companies are flouting tax anti-abuse rules.

  • Umbrella schemes work in similar ways, the agency takes your pay and somehow manages to pay you more than you would receive as a normal employee.  
  • It may be that some of your cash is received as a loan instead of pay, or it maybe that the agency is claiming some kind of deduction on your behalf.
  • The problem is that the loan-pay schemes don’t work since the introduction of the Disguised Remuneration rules, the Contractor Loan scheme  and there are tight rules on deductions, including special rules for travel expenses.

HMRC says 'companies are promising that you can keep 80, 90 or 95% of your wages and be tax compliant (this is unlikely to be true as, in most cases, the basic rate of Income Tax is 20% and National Insurance contributions are also due on earnings). Key features are that:

  • only a fraction of your salary is paid through payroll and subject to PAYE (indicating that you are only paying tax on some of your income)
  • you are paid using a loan, credit or investment payment and the company claims this isn’t subject to income tax or National Insurance contributions (this is tax avoidance)
  • the payment from your umbrella company is routed through various companies before it comes to you

These companies may tell you they are compliant with tax rules but you shouldn’t rely on this.

If you want to speak to someone about getting out of avoidance you should email: This email address is being protected from spambots. You need JavaScript enabled to view it..

If you are aware of these types of arrangements operating you can report them to HMRC.'

Our guides for subscribers

Contractor company planning: does it work?

Disguised remuneration

Personal Service Companies & tax

Agency and intermediary workers tax rules

External link

HMRC Spotlight 45

 

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