For decades, tax avoidance schemes have preyed on UK temporary workers and promised them enhanced pay retention. However, as we all know by now, tax avoidance schemes are not worth engaging with because they are unethical and could land contractors and freelancers in serious trouble in the future. This article summarises some of the most common tax avoidance schemes so you can know the payroll arrangements to avoid at all costs.
Advance Deed
Some tax avoidance schemes will pay workers using an advance that isn’t subjected to tax. In this arrangement, temporary workers are usually required to sign more than just a Contract of Employment.
Loan Payments
It’s well known that many loan schemes operate. These will process payments with the National Minimum Wage (NMW) and a loan that the worker doesn’t need to pay back (thus avoiding tax).
Grants
You may notice a scheme offering grants – a lump sum that doesn’t need to be paid back to help you pay less tax. This is not compliant with HMRC.
Tax Free Payments
A tax avoidance scheme may simply state that you will receive the NMW with a tax free payment or lump-sum. This should instantly set off alarm bells because it’s clearly tax avoidance.
Credits and Shares
You may discover a non-compliant scheme offering to pay you in credits that you can swap for cash once you’ve been paid (e.g. job boards). This isn’t ethical and is a form of tax avoidance. Other schemes have been known to process shares for payments.
Common signs of a tax avoidance scheme
The obvious signs of a tax avoidance scheme include:
- Multiple documents to sign and return – Traditional, compliant umbrella companies will require you to provide proof of ID and complete a series of questions about yourself (such as an address, date of birth, address, bank information, assignment details, etc.). You will also need to sign and return a Contract of Employment. Tax avoidance arrangements will frequently require you to sign and return multiple documents that may seem unusual and state complex payment arrangements – not just your standard PAYE.
- Enhanced payroll options – Commonly, tax avoidance schemes will state unusual methods of processing your payroll to allow you to retain more of your money and pay less tax and National Insurance.
- Higher pay retention – Sometimes, unethical payroll schemes will promote take-home pay upwards of 90% – a clear sign of tax avoidance.
- Strange listings on your payslip – Compliant umbrella companies will clearly state the deductions on your payslip, including tax, National Insurance, employment costs, student loan repayments and pension contributions. Other schemes’ payslips show additional deductions, or less – depending on how it operates. Always check your umbrella will pay you with PAYE – HMRC’s tax system.
- High margin retention – Despite promoting inflated pay retention, some non-compliant umbrella companies may pocket a hefty margin for themselves, meaning despite your pay being higher than it should be (compared to PAYE), the scheme provider is also making a large profit.
- Outside of the UK – Most tax avoidance schemes (but not all) are located outside the UK in a known tax haven such as the Isle of Mann or the Channel Islands.
- Lack of trading history – A lot of tax avoidance schemes have not been around for long – as they pop up and close to avoid alerting HMRC. Always check the umbrella you are using has an established trading history.
The government has produced several guides for temporary workers and recruitment professional to help identify tax avoidance schemes
There is a lot of official government guidance to help temporary workers and recruitment agencies understand the common signs of a tax avoidance scheme and the risks of engaging with them. Please read the following resources:
- Warning for agency workers and contractors employed by umbrella companies (Spotlight 60).
- Repaying a disguised remuneration loan to a third party.
- Corporate report: Current list of named tax avoidance schemes, promoters, enablers and suppliers.
- Corporate report: Information HMRC may publish about tax avoidance schemes, promoters, enablers and suppliers.
- Ten things you need to know about tax avoidance.
- Check your payslip if you work through an umbrella company.
- Check if you are at risk of tax avoidance.
Clicking on the links above will take you to the government’s website.
There are also plenty of guides and articles available on the umbrellacompanies.org.uk website, including:
- Three new tax avoidance schemes make HMRC’s list (31 August 2022).
- IWORK and Contractor Voice collaborate and encourage umbrella companies to promote their fair approach to holiday pay.
- New government guidance designed to help employers and workers understand employment status and rights.
- Contractor UK brings ‘sham’ umbrella company accreditation body to light in alarming article.
Compliant umbrella companies will process your payments with Pay As You Earn (PAYE)
Pay As You Earn (PAYE) is HMRC’s tax system for employees, and this is how compliant umbrella companies will process your payroll. PAYE ensures you contribute the correct amounts of income tax and National Insurance. Once you agree on your assignment rate (the amount you’re paid, which takes the employment costs and holiday pay into consideration), your client or agency will send your gross funds to your umbrella when you’ve completed a certain amount of work. The umbrella will then make the necessary deductions to your pay before sending your net salary to your bank account. The deductions will include tax, Employee’s NI and the employment costs (Apprenticeship Levy and Employee’s NI). You may also notice student loan repayment and pension deductions depending on your circumstances.
Top 10 umbrella companies
Do not put up with substandard service from an umbrella company! There are over 500 in the UK to choose from. To help make your search for the perfect umbrella easier, we’ve collated a list of our top 10. All of our top 10 are accredited by the Freelancer and Contractor Services Association (FCSA) or Professional Passport, and some have special offers at the moment. Switching umbrella companies isn’t difficult, and it may be the perfect option for a happier payroll experience as a temporary worker.
