There’s an old saying that if ‘something looks to good to be true, it probably is’. And with payroll it’s almost always true. So if you see a payroll scheme promising to save you tax or maximise your take home earnings, it pays to be cautious and do your homework. If you join a non-compliant scheme and get caught , you’ll likely be fined as well as paying any tax which is owed.
To understand why, it worth thinking about why payroll companies exist.
Payroll companies are in place to serve workers to make sure they are paid correctly – and indirectly this means they’re also there to make sure that the right tax is collected and paid to HMRC.
Because of this HMRC have always kept a very close eye on payroll companies to make sure that they’re compliant and that every penny of tax which should be collected, is accounted for.
Whilst it might seem attractive to pay less tax than you should, HMRC takes a dim view of this and an especially dim view of payroll companies who offer the schemes that allow this. And because payroll companies collect a lot of tax on their behalf, HRMC keep very close tabs on what payroll companies do and the schemes they offer.
So, non-compliant schemes are high-risk, illegal and definitely a bad idea.
But non-compliant schemes offered by payroll companies can be difficult to spot if you’re not a trained expert. Here’s a list of warning signs to look out for from HMRC that could indicate a non-compliant or high-risk scheme:
If you’re asked to sign more than one document
Your umbrella company asks you to sign another type of contract or agreement in addition to your employment contract
If you’re offered an ‘enhanced’ option
You’re offered an enhanced option where the umbrella company deducts a higher margin or fee from the amount of money they are paid by the recruitment agency or end client, before passing the money on to you
Umbrella companies offering higher take-home pay
Terms stating workers receiving a specific amount or percentage of take-home pay (such as 80%). These are likely to be tax avoidance schemes.
Umbrella using unusual payment arrangements
A loan or non-taxable payment on top of an amount properly paid under PAYE (usually a national minimum wage amount), payments routed through third parties or other complex arrangements, or payments appearing in your bank account as two separate payments, from the same or 2 different entities
If some or all payments you get are said to be non-taxable
If some payments do not appear on your payslip and are described as:
- non-taxable loan
- fiduciary receipts
- credit facility
- capital payments or advances or something similar
If you get more money in your bank account than shown on your payslip or in your Personal Tax Account.
Your payslip may only show the payments properly paid through PAYE, to make it look compliant with the tax rules. If you receive additional payments directly into your bank account it is likely that tax and National Insurance contributions on these payments has not been correctly reported to HMRC.
If you don’t receive a payslip
If you do not get a payslip, check the information reported to HMRC in your Personal Tax Account about your pay and taxes, and see if that matches what you are being paid in total.
Umbrella referral from comparison or broker websites
Some broker sites are owned or operated by tax avoidance promoters. If so, you will be automatically referred to a non-compliant umbrella company operating a tax avoidance scheme owned or operated by the promoter.
Umbrella retaining a higher fee or margin
Umbrella companies operating tax avoidance arrangements often keep more by way of a fee or margin than compliant umbrella companies. You should compare the fee or margin with other umbrella companies to make sure you are not paying higher than normal amounts.
Typically, an umbrella company will charge a fixed weekly or monthly amount — for example, £20 a week. Be cautious of umbrella companies keeping a higher percentage of your invoice value as their fee or margin, as they may be operating a tax avoidance scheme.
Umbrella based outside the UK
You can check any addresses used on contracts and other correspondence to help identify if an umbrella company is based overseas.
You can also search Companies House for details of companies, the directors and those involved in paying you. They may be based overseas if they do not appear in the search results or, if they do appear, the directors may not be resident in the UK.
Peace of mind with the HMRC’s tax calculator
If you’re still unsure whether your payroll scheme is reputable and the scheme you’re part of is compliant, you can use HMRC’s tax calculator to check your take home pay and make sure that all the correct deductions have been made. Your payroll company should also be happy to explain this to you if you have any questions.