Providing you choose a compliant umbrella company – you have nothing to worry about because you’ll be taxed in accordance with HMRC’s PAYE (Pay As You Earn) system. However, if you choose a non-compliant umbrella, you could live to regret it. Keep reading and discover how to spot a non-compliant umbrella company – so you then run away from them!
Umbrella companies have perhaps earnt a somewhat unfair reputation as being dodgy and not operating in their clients’ best interests*. However, compliant umbrella companies offer an efficient and professional payroll service for contractors and freelancers. After all, compliant umbrella companies will ensure their clients pay the correct amount of taxes and National Insurance Contributions (NICs) and directly send these deductions to HMRC! It’s worth adding that most umbrella companies are compliant and have their clients’ best interests at heart! There are only a tiny number of non-compliant providers that are giving the industry a bad name.
For many years, non-compliant umbrella companies have crept into the marketplace and are targeting honest contractors and freelancers. HMRC are well aware of these, and in 2018, they released tax Spotlight 45: Umbrella companies offering to increase your take home pay. If you get a moment, it’s worth a read.
One of the easiest ways to identify a non-compliant umbrella company is to request an umbrella company calculation. If the umbrella is processing PAYE (proof they’re compliant), you should expect to retain roughly 50% to 60% of your salary – after deductions. Therefore, as the name of Spotlight 45 suggests – any umbrella offering you the chance to “increase your take-home pay” is probably non-compliant and should be avoided at all costs. Remarkably, some tax avoidance schemes have had the audacity to offer contractors the chance to retain over 90% of their salary! Don’t ever be tempted!
Compliant umbrellas will receive funds from your agency or client, make the necessary deductions, and then pay you (PAYE) and provide you with a payslip. Non-compliant umbrella companies will do all kinds of unusual things to your money and may present your payslip is an extremely unfamiliar way. For example, some tax avoidance schemes will pay their clients with a “loan” to avoid tax, even though the loan doesn’t need to be paid back. Others may process payments from multiple bank accounts. Other tax avoidance schemes have operated by using job boards and paying their clients in “credits” to exchange for tax-free cash. All of these arrangements sound dodgy, and they are. If you see anything or hear anything like this concerning an umbrella company – alarm bells should ring, and you should not engage with them.
Tax avoidance schemes and non-compliant umbrella companies will boast about their ability to help contractors “pay less tax”. They’re often quite convincing and may use language like “HMRC compliant” and “used by major companies”. Remember – as a UK resident, you’re expected to pay your fair share of tax and NICs. Therefore, you know that you should be paying income tax like the rest of us (starting from 20% once the personal allowance is utilised).
Another indication that a scheme is dodgy is its location. There has been plenty of non-compliant umbrella companies pop up in known tax havens, such as the Channel Islands, Isle of Mann and the Cayman Islands. Make sure any payroll company you use is based in the UK, and we recommend you choose providers with well-respected accreditations and heathy reputations
It’s no secret – some contractors and freelancers deliberately engage with non-compliant umbrella companies because they want to maximise their take home pay. However, many temporary workers engage with non-compliant umbrellas by accident. Maybe they were referred to the dodgy provider by an agency or client, or maybe they were misled when they registered. Either way, engaging with a non-compliant umbrella could have devastating consequences.
HMRC is always actively hunting for tax avoidance schemes, and the people who use them. If you’re found to have avoided tax, HMRC will launch an enquiry into your tax affairs and you’ll be required to pay back every penny of underpaid tax and NICs – possibly with interest, and an additional penalty. If you’d like more information on the consequences, read up on the Loan Charge (2019) – an anti-avoidance legislation targeting workers who have used disguised remuneration (tax avoidance) schemes – specifically loan schemes.
If you believe you are currently using a non-compliant umbrella company, you should contact HMRC to settle your outstanding tax liability. You should also point HMRC in the direction of the scheme (more information is available here).
*One thing we’d like to add – in this blog, we refer people who are using umbrella companies as umbrella company clients. If you register with a compliant umbrella – you become their employee. However, when it comes to non-compliant umbrellas – who knows what you become if you register with them – because they’re unethical and won’t have your best interests at heart. You may simply be a number on a spreadsheet if you use one of these.