When it comes to Umbrella Company take home pay rates, the old adage ‘if it sounds too good to be, it usually is’ couldn’t be more appropriate. Yet despite extensive warning from HMRC and the legitimate umbrella industry, the usage and number of illegitimate umbrella solutions is on the rise.
The simple truth that all contractors need to be aware of is as follows:
If an umbrella company quotes a take home pay in excess of 70% of a limited contract rate, they will NOT be operating legitimately. The only variation in umbrella company take home pay should be the administration fee, apprenticeship levy applicability and pension auto-enrollment. The only way to take home more than 70% is if you undertake significant amounts of business mileage. If a provider offers more than this, you are looking at a tax avoidance scheme.
Operators who are running such murky schemes are clearly using the turmoil of recent legislative reforms such as the off-payroll IR35 changes to capitalise by marketing their solutions to contractors feeling the financial strain. Given the circumstances it’s not difficult to understand why many are being tempted by offers of 80 to 90% take home pay. However these individuals need to beware that their short term gain will almost certainly come at the expense of long term pain.
HMRC are increasingly finding against contractors using tax avoidance schemes, demanding backdated taxes which can equate to huge personal liabilities. In some noteworthy cases, contractors have needed to sell their homes in order to raise funds to repay the enormous tax debts which they are clocking up. It is important to recognise that it is not the unscrupulous provider that will be in trouble if caught, it will be YOU.
One common method of boosting contractor take home pay is via the use of a loan scheme. These schemes work by paying the contractor a very low base taxable salary with the balance of earnings paid out as a loan. The catch is that the moment the loan is written off it becomes fully taxable. Alternatively if not written off, then you still owe the money to the umbrella operator in full which could be called in at some point in the future if the operator was to cease trading. The headline grabbing take home pay figures and plausible service promises belie the sinister truth that users will be majorly damaged.
There are numerous other examples of questionable schemes in use as part of an almost constant stream of new and elaborate ways to try to beat the system. Some of the most common methods are: tax free payments, advanced payments, annuities, loyalty points and profit extraction.
However HMRC are well across all of these and will be investing increasingly significant resources to upping their fight against this. HMRC have already closed down many such schemes so it is now only a matter of time before the guillotine falls on the rest leaving retrospective tax bill carnage.
We can’t name and shame any particular umbrella operators for obvious reasons, however remember the simple compliance test which holds true in most circumstances:
If offered more than 70% take home pay…avoid.
Established in 1994, FPS Group is one of the industries most trusted and compliant umbrella solution providers. Our umbrella solutions are fully HMRC compliant with full income tax and national insurance deductions made giving you unparalleled peace of mind. So save yourself the worry and choose FPS Group for your payroll.