HMRC have published a 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.

This is a freeview 'At a glance' guide to HMRC's views on Umbrella companies.

  • 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. There are tight rules on deductions, including special rules for travel expenses.

HMRC say '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 (NICs) 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.

HMRC provides an Interactive Tool for Contractors, this should help you to work our if you are at risk of tax avoidance. 

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.

Useful guides on this topic

Disguised remuneration
What is disguised remuneration? What is the loan charge? When does the loan charge apply? Will the loan charge affect me?

Personal Service Companies & tax
What is a PSC?  What are the tax implications for a PSC?  

Agency and intermediary workers tax rules
What are the tax rules for Employment Intermediaries and Agencies? Are agency workers subject to PAYE? 

External link

HMRC Spotlight 45

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