The government has been very busy writing guidance to help those who require the services of umbrella companies. Earlier in the year, the government published advice on working through an umbrella company. Since then, we’ve seen multiple new guidance pieces appear on the government’s website, including information on the risks of engaging with tax avoidance schemes and advice for recruitment businesses when referring candidates to a payroll provider. This article will summarise the government guidance called ‘Check your payslip if you work through an umbrella company’ – released in November 2021. This article includes helpful links to additional resources to help contractors and freelancers move forward compliantly and confidently.
Please click here to view the official government guidance entitled: Check your payslip if you work through an umbrella company.
Overview
In this guidance, the government acknowledge that “many umbrella companies follow the tax rules but some do not”. As a result, you must understand your umbrella company payslip so that you can be confident you’re paying the correct Income Tax and National Insurance Contributions.
If you notice that you’re being paid more by your umbrella company than what is shown on your payslip, this could be a clear sign that you’ve registered with a tax avoidance scheme. To check what your tax and National Insurance Contributions should be, the government suggest you use the following tools:
- HMRC’s Tax Calculator – a simple tool to help you understand how much tax you should be paying based on your income.
- HMRC’s National Insurance Calculator – another straightforward tool that allows you to see what your National Insurance Contributions should be based on your income.
Look out for the following…
The government guidance warns that some “payslips will not show all payments made by the umbrella company, particularly where they involve loan type payments”. Therefore, some payslips may deliberately look compliant when they are not showing the bigger picture.
If you receive additional income from your umbrella, you may receive an email with the details or a message via other means. You must understand the types of non-compliant payments that you could receive as part of a tax avoidance scheme. These might include (list taken from official government guidance):
- loan
- annuity
- bonus
- profit share
- fiduciary receipt
- credit facility
- capital payment
- capital advance
All payments should be subjected to Pay As You Earn (PAYE) – the government’s tax system for employees. If you notice this hasn’t been applied to your payments, you should seek assistance and report the umbrella company immediately.
It’s also important to understand any fees that you may be paying in exchange for payroll services. The guidance states that you “should also compare the fees with other companies to make sure you are not paying higher than the normal fees, as this could be a sign of tax avoidance.”
Example payslips that show legitimate PAYE versus a disguised remuneration scheme
The government guidance includes examples of two payslips – one showing the take-home pay of a contractor using a legitimate PAYE umbrella company, and the other showing a disguised remuneration scheme.
The government confirm that “you need to check that your payslip includes all your income and that tax and National Insurance has been correctly deducted.”
Rather than copy them here, we strongly advise you to click here and view the official government examples for yourself. These are really important to help you understand umbrella company payslips.
The risks of using a disguised remuneration arrangement (tax avoidance scheme)
Engaging with a disguised remuneration arrangement (tax avoidance scheme), even by accident, could have devasting implications.
If you use a tax avoidance scheme, you will be liable for:
- The unpaid tax and National Insurance Contributions.
- Interest on tax.
- Potential associated penalties.
How to report a non-compliant umbrella company
If you believe you’re using a non-compliant umbrella company, it is down to you to leave the arrangement, settle your tax affairs and keep the government in the loop. The official guidance suggests two ways to report a non-compliant umbrella company:
- Using an online form on the government’s website.
- Calling HMRC.
Please note: the government ask you to “add the reference ‘COCA’ to the box in section 1 of the online form called ‘other information you think may be relevant’, or give this reference when you call HMRC.”
As confirmed in the payslip guidance, the government state: “HMRC does not approve or endorse umbrella companies or tax avoidance schemes”.
If you would like more information on reporting non-compliant umbrella companies, please read our blog: How To Report A Non-Compliant Umbrella Company.
Further government guidance for temporary workers about umbrella companies
We have recently published a blog that summarises the recent government guidance to help temporary workers when it comes to understanding umbrella companies and the risks of engaging with tax avoidance schemes. Please click on the links below for more information. We also recommend you frequently visit the government’s website to keep updated with the latest news. There is a lot of helpful stuff published online, and it’s designed to help you make well-informed decisions regarding your payroll.
- What Government Guidance Is Available About Umbrella Companies?
- Working through an umbrella company
- Check if you are at risk of tax avoidance
- Check how to reduce your risk of using an umbrella company who operates a tax avoidance scheme – guidance written for recruitment agencies and businesses who engage with temporary workers
Additional Resource – Umbrella Company Calculator
The team at Umbrellacompanies.org.uk has recently launched a brand new umbrella company calculator – and we think it could help you understand your take-home pay through an umbrella company. The tool is designed to be accurate and transparent and provides you with a breakdown of your income (including all the deductions you should expect to see).
The umbrella company calculator is free to use as often as you like and provides instant results via email. Please check it out now and share it with your friends and colleagues.
Top 10 umbrella companies
It would be best if you undertook thorough due diligence when deciding which umbrella company to use for your payroll. We recommend you choose an umbrella company that is accredited by either the Freelancer and Contractor Services Association (FCSA) or Professional Passport. These are the two most respected professional bodies in the UK committed to ensuring the supply chain of temporary workers is compliant with government rules and regulations. If a company has one of these accreditations, it means they have successfully undergone a series of assessments and audits to check all procedures are in line with UK tax law. They have proven they operate compliantly and in the best interest of their employees.
We have put together a list of our top 10 umbrella companies. They are all accredited by either the FCSA or Professional Passport, and some have special offers at the moment. Please check them out.
