Warning for agency workers and contractors employed by umbrella companies (Spotlight 60)
Find out about the tax avoidance arrangements used by some umbrella companies.
Many umbrella companies are compliant with the tax rules, but some use contrived arrangements that claim to allow agency workers and contractors to keep more of their earnings. These arrangements are tax avoidance schemes and most of them do not work.
Some umbrella companies benefit financially by using contrived arrangements like disguised remuneration to pay workers. For example, an umbrella company might want to claim that a payment is non-taxable to try to avoid paying employer National Insurance contributions (NICs) on it — currently 15.05% of the payment.
Using these non-compliant umbrella companies could leave you at risk of being involved in a tax avoidance scheme, and owing HMRC money, even if you did not set out to try to avoid tax.
You are responsible for your own tax affairs and for paying the correct amount of Income Tax and National Insurance contributions. Most tax avoidance schemes simply do not work and anyone who uses them is at risk of ending up with a large tax bill. You may also find that the umbrella company has deducted a fee (this may be called a margin) from your earnings for using their services, which could be higher than the standard fees. Any tax you owe will be in addition to this.
Under PAYE regulations your employer has an obligation to deduct tax and National Insurance contributions from your employment income on your behalf. However, where this does not happen HMRC may, in some circumstances, recover the tax directly from you.
What we publish about tax avoidance schemes and those promoting them
Some umbrella companies or people promoting them claim that their tax arrangements or tax avoidance schemes are HMRC approved. HMRC never approves avoidance schemes or the compliance of any umbrella companies.
Find information about known tax avoidance schemes and about the people involved in the supply and marketing of them.
This is not a complete list of all:
- tax avoidance schemes currently being marketed
- promoters, enablers and suppliers
If a tax avoidance scheme is not shown in the list, this does not mean that the scheme works or is in any way approved by HMRC. It could still be avoidance.
If you are involved in any of these schemes or recognise any of the promoters, enablers or suppliers you should contact HMRC as soon as possible.
How these arrangements claim to work
These tax avoidance arrangements, known as disguised remuneration schemes, involve an umbrella company giving you some or all of your pay in the form of a loan, salary advance, grant, annuity or any other payment you’re told you’re not expected to pay back. These payments are claimed to be non-taxable, often without explanation, and can lead to a higher take home pay.
You may be asked to sign an agreement with an umbrella company, in addition to your employment contract. This will often be a loan or other agreement that attempts to disguise some of the payments paid to you by your umbrella company as something which is non-taxable. We are seeing a rise in arrangements where no additional agreements are entered into and little effort is made to disguise the untaxed payments as something which is not taxable.
The untaxed payment may be diverted through a chain of companies, trusts or partnerships (often based offshore) and paid to you by a third party. In other cases, the payments may be made directly to you from a UK based umbrella company.
Check Spotlight 45 to find out what to do if an agency or umbrella company offers to reduce your tax liability and increase your take home pay.
Signs you are at risk of being involved in tax avoidance
Check the following examples of warning signs of tax avoidance schemes.
If you’re asked to sign a short or brief employment contract — or not getting any written employment contract
Not all umbrella company employment contracts give you the full terms and conditions. You may only get a short contract with minimal detail of the terms and conditions of your employment. This could be a sign of a tax avoidance scheme or other types of non-compliance with tax and employment rules.
Be extremely cautious of digital employment contracts where the detailed terms and conditions are found in a separate document, or a hyperlink that cannot easily be accessed, printed or saved. This could be to stop you from knowing the exact arrangements and how you will be paid by the umbrella.
Make sure you:
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Get an employment contract.
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Read all the details in your contract.
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Do not sign up to anything you are uncomfortable with or do not understand.
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You should keep a copy of your contract — so it cannot be changed without your agreement at a later date.
If you’re asked to sign more than one document
Your umbrella company may ask you to sign another type of contract or agreement in addition to your employment contract — this can be a sign of a tax avoidance scheme.
If you’re offered an ‘enhanced’ option
You may be offered a choice between ‘standard’ or ‘enhanced’ arrangements. They may be described as tax efficient. The enhanced option may mean the umbrella company will deduct a higher margin or fee from the amount of money they are paid by the recruitment agency or end client, before passing the money on to you. This is likely to be tax avoidance.
Umbrella companies offering higher take-home pay
Some umbrella companies frame things in terms of their workers receiving a specific amount or percentage of take-home pay (such as 80%). These are likely to be tax avoidance schemes. When you see such offers remember that the basic rate of Income Tax is 20% and you also need to pay National Insurance contributions on top. Use HMRC’s online tax calculator to check how much tax you should expect to pay on your earnings.
Umbrella using unusual payment arrangements
On top of an amount properly paid under PAYE (usually a national minimum wage amount), some umbrella companies may pay part of your earnings (described as a loan or non-taxable payment) directly into your bank account. Other umbrella companies may route this payment through third parties or other complex arrangements. Your total pay may appear in your bank account as two separate payments, from the same or 2 different entities. This could be a sign of tax avoidance. All of the payments you receive relating to your earnings need to be considered for tax and National Insurance contributions.
If some or all payments you get are said to be non-taxable
Some payments may not appear on your payslip and may be described as:
- non-taxable loans
- annuities
- bonuses
- shares
- fiduciary receipts
- credit facility
- capital payments or advances or something similar
These payments are no different to normal employment income, so you still need to pay Income Tax and National Insurance contributions on them.
If you get more money in your bank account than shown on your payslip or in your Personal Tax Account
Your payslip may only show the payments properly paid through PAYE, to make it look compliant with the tax rules.
You may receive additional payments that have not been taxed directly into your bank account and which do not appear on your payslip. It is likely that tax and National Insurance contributions on these payments has not been correctly accounted for under PAYE and not reported to HMRC. The net pay on your payslip will be less than what you’ve received in your bank account.
Use HMRC’s online tax calculator to check how much tax you should expect to pay on your total earnings. The calculator will work out what your take-home pay should be after Income Tax and National Insurance contributions.
If you do not get a payslip, check the information reported to HMRC in your Personal Tax Account about your pay and taxes, and see if that matches what you are being paid in total.
Umbrella referral from comparison or broker websites
Some of these websites are owned or operated by tax avoidance promoters. If this is the case, anyone searching on them for an umbrella company will be automatically referred to a non-compliant umbrella company operating a tax avoidance scheme which is either owned or operated by the promoter.
Check ‘Comparison and broker websites marketing umbrella companies are not always what they seem (Spotlight 55)’ for more information.
Umbrella retaining a higher fee or margin
Umbrella companies operating tax avoidance arrangements often keep more by way of a fee or margin than compliant umbrella companies.
You should compare the fee or margin with other umbrella companies to make sure you are not paying higher than normal amounts.
Typically, an umbrella company will charge a fixed weekly or monthly amount — for example, £20 a week. Be cautious of umbrella companies keeping a higher percentage of your invoice value as their fee or margin, as they may be operating a tax avoidance scheme. The average amount a non-compliant umbrella company keeps is around 15% to 22%.
Umbrella based outside the UK
You should check any addresses used on contracts and other correspondence to help identify if an umbrella company is based overseas.
You can also search Companies House for details of companies, the directors and those involved in paying you. They may be based overseas if they do not appear in the search results or, if they do appear, the directors may not be resident in the UK.
Even where an umbrella company has a UK phone number they may still be based outside the UK. Companies House provides a range of information such as company details and a register of disqualified directors. For tax purposes, outside the UK includes places such as the Isle of Man and the Channel Islands.
Why these arrangements do not work
The vast majority of these types of arrangements do not work. They do not achieve tax savings and Income Tax and National Insurance contributions remain due on any “loan” or other non-taxed payments made to you by an umbrella company, either directly or through a third party.
Any amounts paid to you as part of your reward for the work you carry out are counted as employment income and should be subject to Income Tax and National Insurance contributions under PAYE. This is regardless of whether the payments are for earnings or wages or described or claimed to be something else such as a loan. It does not matter whether they are paid to you directly from an umbrella company or through a third party. You should not trust any umbrella company which tells you otherwise.
Repaying a disguised remuneration loan to a third party
You may have been contacted by a third party about repaying a loan that you took out from a disguised remuneration scheme. In most cases, the request for repayment is because the original provider of the loan has sold the outstanding loans to a third party. In some cases, a loan may also be recalled by an insolvency practitioner.
Some of these third parties are now contacting users of the scheme to demand repayment of their outstanding loans — even if users believed they would not be asked to repay the loans. We are very concerned to hear about these requests for repayment of loans and understand this may be distressing for those affected.
The government is unable to intervene in a dispute between two private parties over loan contracts. Check ‘Repaying a disguised remuneration loan to a third party’ for further information if you’re affected by this, including actions you can take to protect yourself, and organisations you may wish to contact.
Get advice if you are worried about using these types of schemes
Check ‘Tax Avoidance – don’t get caught out’ for details about non-compliant umbrella companies and how to spot tax avoidance schemes. If you think you have been caught up with a non-compliant umbrella company, you should consider getting independent professional tax advice. Check get help with tax. If you are on a low income you could also contact a tax charity such as Tax Aid.
Check ‘Working through an umbrella company’ to find out more about how and what you should be paid when working through an umbrella company.
If you are working through an agency they should provide you with a key information document (KID). If you have not received one, ask your agency to provide one. This will tell you about your pay and employment. It will show you the deductions and fees in relation to assignment and contract rates, and how they affect your gross and net pay.
Get more information or report a scheme and an umbrella company
If your umbrella company is operating a tax avoidance scheme, HMRC strongly advises you to move to a compliant umbrella company as soon as possible.
You can report tax avoidance to HMRC anonymously and we will investigate the non-compliant umbrella company. You do not have to give your name, address or your email.
You can phone HMRC if you cannot use the online form.
If you think you are involved in tax avoidance you should contact us and settle your tax affairs to prevent building up a large tax bill. We are here to help. We offer a range of support to get you back on track or avoid being caught out in the first place.
Paying your tax
You can talk to HMRC about options for paying any unpaid tax.
If you’re facing difficulty in making a tax payment you should ask us about affordable monthly payment options. We’ll always try to work with you to negotiate time to pay based on your income and expenditure.
Time to pay arrangements are based on an individual’s specific financial circumstances, so there is no ‘standard’ time to pay arrangement. We look at what you can afford to pay and then use that to work out how much time you need to pay and over what time period.
By withdrawing from the arrangements and settling your tax affairs, you’ll:
- minimise interest and penalty charges (where they apply) on tax you should have paid
- avoid any costs of investigation and litigation
If you’re already speaking to someone in HMRC about your use of an avoidance scheme, you should contact them to discuss this further.
If you do not have an HMRC contact, and you want to discuss paying any unpaid tax due email [email protected].