If you’re researching the market for a suitable umbrella company, you’re likely to come across a wide variety of schemes, some of which claim to offer unusually generous rates of take home pay.
Some of the most frequently-used claims include:
- “90%+ take home pay”
- “100% HMRC compliant”
- “QC approved scheme”
PAYE vs. tax avoidance schemes
Legitimate PAYE umbrella schemes can only ever provide clients with the same amount of take home pay – subject to standard deductions for income tax and National Insurance Contributions. The only difference contractor clients should notice between providers is in the weekly or monthly processing fee they charge.
The only way to achieve a higher rate of take home pay is by joining a tax avoidance scheme – a decision you may come to regret in the future. The current Government has committed huge resources to tackling all forms of tax avoidance, and some contractors who have used such schemes in the past may have been presented with retrospective tax claims.
With this in mind, we asked Lisa Keeble, co-founder of All Umbrella Companies Are Equal, what contractors should look out for when presented with eye-watering take home pay claims.
What does ‘HMRC approved’ mean?
On its own website, HMRC categorically states: ‘HMRC never approves tax avoidance schemes’.
Sometimes you will be led to believe that a scheme has been approved because it has been given an SRN under the DOTAS rules, but all this really means is that the promoter has complied with his legal obligations to tell HMRC about an avoidance scheme. It does not mean that HMRC has approved the scheme or that you can rely on it.
Is 90% tax home pay achievable?
Let’s take a moment to think about it. The basic rate of income tax in the UK is 20%; the basic rate of corporation tax is 20%, so that doesn’t stack up!
You also have to bear in mind that the scheme provider will take a cut – usually around 8% – so your contribution to the Government’s coffers will be about 2%. The types of scheme that offer this sort of return will usually use some sort of loan scheme which has no commercial rationale and has been devised for no purpose other than to avoid tax. See this extract from the HMRC website:
Tax planning to be wary of:
- It sounds too good to be true.
- Artificial or contrived arrangements are involved.
- It seems very complex given what you want to do.
- There are guaranteed returns with apparently no risk.
- The scheme is said to be vetted by a top lawyer or accountant but no details of their opinion are provided.
New HMRC tax avoidance powers
You may say that HMRC are bound to say this sort of thing to scare people away from using tax planning vehicles, however, later this year, new legislation is being introduced which will give HMRC unprecedented powers.
The tax authorities will be able to demand underpaid tax, interest and penalties from users of schemes which haven’t been tested in court – using the same mechanism as those that have.
The Offshore Intermediaries legislation will mean that a recruitment agency will be liable for PAYE and NIC obligations if they work with an offshore umbrella company.
The Onshore Employment Intermediaries legislation will prevent umbrella companies from registering contractors as sole traders (which avoids Class 1 National Insurance contributions), and the General Anti Abuse Rule will catch anything else not covered by all the other new legislation.
The upshot of all this is that compliant umbrella companies will only pay you through PAYE; a typical umbrella margin will be around £25-£30 per week. Find out more in our guide to choosing a PAYE umbrella company.
Before you settle for any one company, do your research. Contractor forums are a great place to learn from other people’s experiences.
Don’t forget that HMRC can go rifling back through your tax affairs for years and they are not known for their understanding – currently penalties up to 200% of tax owed can be applied!