HMRC is aware of schemes that claim to increase your take-home pay by paying less Income Tax and National Insurance contributions. These schemes do not work and by using them you may be taking part in tax avoidance.
How these schemes work
Most umbrella arrangements operate within the tax rules, and correctly deduct tax and National Insurance contributions from all your earnings using PAYE.
Some promoters of tax avoidance schemes set up umbrella companies and use them to convert income into something else (sometimes described as a ‘loan’). These schemes promise better take-home pay as a result of avoiding tax. The promoters of these schemes also charge fees which are often 10% or more of your gross income.
Tax avoidance schemes do not work and can result in unintended tax consequences. You could end up paying much more than you were trying to avoid in the first place. If something looks too good to be true, then it almost certainly is.
Read Spotlight 45: umbrella companies offering to increase your take-home pay for more information on tax avoidance and umbrella companies.
Before you sign up to a scheme
You should do your own research to find out more about the adviser and the scheme on offer before you sign up to it.
If a promoter says their scheme is legal or that they have legal opinion, it does not mean it works. A lawyer may have given an opinion on a scheme, but often it’s heavily dependent on a list of circumstances that may not be relevant to you. You cannot rely on an opinion given to somebody else. It’s also only one opinion and may not be correct.
If you sign up to a scheme that does not work, you may end up with a higher tax bill than expected at first.
If you need advice
You can ask an independent, qualified, accountant or tax adviser who is a member of a professional body that regulates its members’ standards and behaviour.
If you’re recommended a scheme by someone you believe to be an adviser, you can research to find out:
- what qualifications and experience the adviser has
- whether they are a member of a professional body in the UK that has a code of conduct to regulate its members
If you receive bad advice such as mis-selling, the professional body can investigate your complaint.
However, you are responsible for your own tax affairs and paying any taxes you owe.
Get help if you do not understand something about your tax.
What you should check
Use HMRC’s online tax calculator to check how much tax you should expect to pay on your earnings. The calculator will work out what your take-home pay should be after Income Tax and National Insurance contributions.
Compare this figure with your current take-home pay in your Personal Tax Account (PTA).
You should ask the person who is offering you the work for a breakdown of how the whole arrangement works. Look for details such as:
- your pay rate
- fees you are being charged and what they relate to
- whether tax and National Insurance contributions have been deducted
You can then compare the figures to see if tax is being paid or avoided.
Find out more about how to identify tax avoidance schemes.
Claims that the schemes are HMRC approved or compliant
Promoters may describe their schemes as ‘HMRC approved’ but this is not the case – HMRC does not approve tax avoidance schemes.
HMRC never authorises the use of statements such as ‘HMRC compliant’ or ‘HMRC approved’. We do not approve schemes that claim they can help people avoid paying tax and boost their take-home pay.
Promoters should tell HMRC about their schemes under the Disclosure of Tax Avoidance Schemes (DoTAS) rules. HMRC allocates such schemes a reference number. The fact that we have acknowledged a disclosure and given it a reference number does not mean that HMRC has approved or endorsed that scheme. This only means that the promoter has disclosed it under the DoTAS rules.
We refer any adverts that make these false claims to the Advertising Standards Authority.
The risks of using these schemes
Any scheme offering better take-home pay by converting your income into something else (for example, a loan), which results in you not paying the tax you owe is considered by HMRC as tax avoidance.
HMRC challenges tax avoidance. If you use such a scheme you are likely to end up with a bill for any back taxes owed, including interest on tax paid late and possibly a penalty.
This will not include the fees you pay to the promoter of the scheme, which you are unlikely to be able to recover if the scheme does not work. This may happen some years later and can be expensive.
HMRC can look at your tax position for earlier years to establish that the correct amount of tax has been paid. Investigations to check that you have paid the correct amount of tax can be lengthy and stressful.
If you’ve been asked to sign up to a scheme
Employers or employment agencies should not tell you to use a particular scheme as a condition of getting work. You should be very wary, as the person encouraging you to do this may have a vested interest in pushing you into a scheme.
You might also be asked by a work colleague to join them and other colleagues in a scheme. Just because they tell you everyone is using it or that they take-home more money, does not mean it is legitimate. Often, they are incentivised by a commission for encouraging you to join up.
Fees and other costs you could pay
The costs of joining an arrangement or scheme can vary. You are unlikely to get a refund of any fees you’ve paid if things do not go as intended.
You could find that you’ve paid a fee for something which was never going to work, along with a bill for the tax you should have paid.