How are some Umbrella Companies able to offer me 80%+ of my day rate?

First of all, if anything seems too good to be true, it usually is.

There are a large number of non-compliant Umbrella payroll companies on the market who promote various tax avoidance schemes which (supposedly) enable contractors take home a high percentage of their contract value (usually somewhere in the region of 80% – 90% take home pay).  Whilst there are many variations of these schemes, they are usually structured in a way where part of the contractor’s payment is made to them in the form of a loan.  As loan payments are not subject to Tax and National Insurance deductions the contractor takes home a higher percentage of their earnings.

 

How did this come about?

When the amendments were made to IR35 regulations across the public sector in April 2017, thousands of interim social care practitioners were forced to register with an Umbrella payroll company at very short notice.  This led to many practitioners being scooped up by the non-compliant operators who won their trust (and business) by luring them with promises of taking home the highest possible amount from their contract value.

 

Increasing take home sounds great right? What’s the catch?

According to HMRC these Umbrella loan schemes simply do not work.  HMRC categorise loan payments made through these schemes as a form of ‘disguised remuneration’.  Instead of being regarded as a genuine ‘tax free loan’ HMRC deem these payments as disguised income.  Subsequently, the full amount of Income Tax and National Insurance deductions should have been applied when the payment was made to the contractor.  The “Loan Charge” scheme was HMRC’s initiative to clamp down on those who have used these schemes and to reclaim the unpaid taxes.

 

The “Loan Charge” was introduced by HMRC in April 2019

This was introduced to reclaim unpaid taxes from Contractors who (whether knowingly or unknowingly) used non-compliant umbrella payroll companies.  The liability falls directly on to the individuals and not the unscrupulous companies that duped them.   An article in the Times Money indicated that the HMRC were actively pursuing over 100,000 Contractors that were duped into using this scheme wand they face tax bills that could potentially bankrupt them.

Ultimately, although the higher take home pay is attractive, it’s just not worth the risk.

 

So what do I need to look out for?

  • Is the take home quoted unrealistically high? Under the UK PAYE system you should be expecting to take home 60-70% of your overall pay, any higher indicates the scheme isn’t compliant.

 

  • Will you receive multiple payments? There is no reason that you should receive multiple payments for the same period of work, if the Umbrella informs you that they will pay you a small salary followed by a larger payment then that is a loan.   

 

  • Are they professionally accredited? Umbrella companies that are members of the FCSA (Freelancer & Contractor Services Association) have been independently assessed as meeting the highest levels of compliance and best practice in the industry.  If you register with an accredited member of the FCSA you can be confident they will manage your umbrella payroll arrangements compliantly.

Click here to see our Recommendation for an Umbrella Company that is a fully compliant member of the FCSA you can trust to offer you the best overall package for a competitive price.

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