Use this guide if you’re thinking about using or your employer has asked you to use an umbrella company. This could be whilst working on either a fixed term or temporary contract.
Most umbrella companies are compliant with tax rules. But there are some promoters of tax avoidance schemes using comparison and broker websites, as well as direct telephone calls, to introduce people to umbrella companies not abiding by the tax rules.
Comparison websites often act as brokers to help people find a suitable umbrella company. They rank and rate the companies based on customer service and fees charged.
The attraction of people using umbrella companies could be claims that they can have higher take home pay. Sometimes, people are unaware of signing up to companies that involve tax avoidance arrangements. Read Spotlight 45 for guidance on this.
Before you sign up to any arrangement, read the guidance aimed at contractors or agency workers.
You will be at risk if you use an umbrella company that involves tax avoidance. You’re legally responsible for your tax affairs and paying the correct amount of Income tax and National Insurance contributions (NICs).
These arrangements are never approved by HMRC. As well as the fees you pay to the umbrella company, the arrangements may end up in you paying extra tax and interest. Penalties may also apply.
Warning signs to consider
Adverts for umbrella companies listed on comparison websites are not always legitimate. Look to see if the umbrella company has a:
- company name
- postal address
- company registration number
Some may have very basic web pages with little to no information. They may only have a registration form asking for your personal details to receive a quote. You should do some research to verify that it’s legitimate.
You should always ask for a full and transparent breakdown of all deductions the company will take from your total earnings. This is to make sure you pay the correct amount of Income tax and NICs.
Deductions may include:
- the umbrella companies’ fees - most charge either a fixed or percentage fee of taxable earnings, on a weekly or monthly basis
- Income tax and NICs on all earnings
You should make sure that the amounts on each payslip reflect your total earnings. This means the total amounts you expect to receive according to your contract. You can use HMRC’s online calculator to check you’re paying the correct amount of tax.
Be aware if you receive your salary payments through different routes. You may also find one part of your payment does not appear on your payslip. It may mean that the full amount of deductions for your Income Tax and NICs has not been taken.
Some comparison websites and third-party brokers may offer both compliant and non-compliant arrangements.
Non-compliant arrangements are sometimes called ‘advanced’ or ‘enhanced’ umbrella services and may come with statements such as:
- ‘We ensure you get the highest take home pay’
- ‘Retain 80% of your earnings after tax - safe and compliant’
- ‘Compliant tax efficient pay’
- ‘We only use HMRC compliant umbrella companies that are independently reviewed’
- ‘QC approved’
These statements are misleading. HMRC does not approve any umbrella companies.
How these arrangements claim to work
Non-compliant umbrella companies use various arrangements to pay people for their services. The payments may not have tax deducted and could be through loans or payments sometimes described as:
- fiduciary receipts
- credit facility
- capital payments or advances
Sometimes the umbrella company will ask the contractor to sign another agreement. This is as well as their employment contract. This could be with the umbrella company or a third-party entity or trust, based outside the UK.
This should not be necessary if earnings are fully taxed and is most likely to involve tax avoidance. This is because the contractor’s pay is being supplemented by an untaxed or undeclared amount, described as something other than earnings.
The risks of using these arrangements
Using an umbrella company that claims you’ll be able to take home a higher percentage of your pay is very risky.
HMRC will always challenge tax avoidance arrangements. If you use a non-compliant umbrella company, you’re likely to be avoiding tax. You may end up paying extra tax, NICs and interest. You may also have to pay penalties on top of the fees to the umbrella company.
What you should do if you’re using these or similar arrangements
You should get independent professional advice, if you’re not sure whether your umbrella company is compliant with the tax rules. HMRC cannot tell you whether a comparison or broker website is promoting a legitimate umbrella company.
If you’re using or have used an umbrella company offering a high rate of income retention, you need to withdraw and settle your tax affairs with HMRC.
You should also report these types of arrangements to HMRC.