We have been made aware of an umbrella company offering contractors dividend payments to increase their pay retention. We’re not here to name names, and we’re not here to scaremonger. However, we are here to educate our readers and help contractors, freelancers, and temporary workers make well-informed decisions regarding their payroll. Please keep reading, and we’ll explain how this non-compliant umbrella company arrangement was proposing paying its employees.
A reader has contacted umbrellacompanies.org.uk to ask our opinion on an umbrella company and its take-home pay calculations. We’re not going to name the reader or the umbrella company. Still, we will explain why we believe the umbrella company in question is encouraging people to avoid paying the correct amount of tax.
A textbook example of a tax avoidance scheme
The arrangement that was bought to our attention is a classic example of a tax avoidance scheme. The contractor who contacted us confirmed they had approached a payroll provider for an inside IR35 role. The solution they were offered involved being paid the National Minimum Wage (NMW) to minimise tax and National Insurance Contributions (NIC). The Rest of the contractor’s earnings were to be invested into the payroll company in exchange for shares and then allocated back to them in the form of dividends – thus reducing the contractor’s tax and NIC liabilities and increasing their pay retention.
Contractors, freelancers and temporary workers inside IR35 are expected to pay tax very similarly to permanent employees – PAYE. Therefore, realistic take-home pay retention will be roughly 55-65 percent. The payroll provider that was bought to our attention was offering the contractor the chance to retain upwards of 75% of their pay – despite being inside IR35. Engaging with this type of payroll arrangement could result in a considerable tax bill in the figure – and it should be avoided (in our opinion) at all costs.
The risks of engaging with a tax avoidance scheme
If you use a tax avoidance scheme or take advantage of disguised remuneration, you’ll probably retain more of your money than a compliant umbrella company. However, while tax avoidance is technically legal, HMRC is retrospectively punishing those who engage with them. You may be able to pocket a few extra quid now, but down the line, you could face a life-changing tax bill. HMRC continuously increases its efforts to catch both those facilitating tax avoidance and those who engage with tax avoidance schemes. Therefore, whether it’s a year in the future – or five years – expect HMRC to come knocking.
If you believe you are engaging with a tax avoidance scheme or you have used one in the past, HMRC is urging you to get in contact with them to settle your tax affairs.
We need your help!
If you come across a non-compliant umbrella company, or you’re concerned that a payroll provider is not operating compliantly or ethically, please report them to HMRC. We’ve written a blog that’ll help: How to report a non-compliant umbrella company.
We would be delighted to hear your thoughts on the arrangement in question, so please feel free to email us, and we can share the situation with our readers (keeping your information private – of course). Please email as much information as possible to firstname.lastname@example.org.
Top 10 umbrella companies
Are you looking for a dependable and ethical umbrella company to assist with your payroll? We can help! Please visit our top 10 umbrella companies. Each of them is accredited by either the FCSA or Professional Passport – so you can be sure you’re in the safest hands!