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Use this guide if you鈥檙e thinking about using or your employer has asked you to use an umbrella company. This could be whilst working on either a fixed term or temporary contract.

Most umbrella companies are compliant with tax rules. But there are some promoters of tax avoidance schemes using comparison and broker websites, as well as direct telephone calls, to introduce people to umbrella companies not abiding by the tax rules.

Comparison websites often act as brokers to help people find a suitable umbrella company. They rank and rate the companies based on customer service and fees charged.

The attraction of people using umbrella companies could be claims that they can have higher take home pay. Sometimes, people are unaware of signing up to companies that involve tax avoidance arrangements. Read Spotlight 45 for guidance on this.

Before you sign up to any arrangement, read the guidance aimed at contractors or agency workers.

You will be at risk if you use an umbrella company that involves tax avoidance. You鈥檙e legally responsible for your tax affairs and paying the correct amount of Income tax and National Insurance contributions (NICs).

These arrangements are never approved by HMRC. As well as the fees you pay to the umbrella company, the arrangements may end up in you paying extra tax and interest. Penalties may also apply.

Warning signs to consider

Adverts for umbrella companies listed on comparison websites are not always legitimate. Look to see if the umbrella company has a:

• company name
• postal address
• company registration number

Some may have very basic web pages with little to no information. They may only have a registration form asking for your personal details to receive a quote. You should do some research to verify that it鈥檚 legitimate.

Deductions may include:

• the umbrella companies鈥� fees - most charge either a fixed or percentage fee of taxable earnings, on a weekly or monthly basis
• Income tax and NICs on all earnings

You should make sure that the amounts on each payslip reflect your total earnings. This means the total amounts you expect to receive according to your contract. You can use HMRC鈥檚 online calculator to check you鈥檙e paying the correct amount of tax.

Be aware if you receive your salary payments through different routes. You may also find one part of your payment does not appear on your payslip. It may mean that the full amount of deductions for your Income Tax and NICs has not been taken.

Some comparison websites and third-party brokers may offer both compliant and non-compliant arrangements.

Non-compliant arrangements are sometimes called 鈥榓dvanced鈥� or 鈥榚nhanced鈥� umbrella services and may come with statements such as:

• 鈥榃e ensure you get the highest take home pay鈥�
• 鈥楻etain 80% of your earnings after tax - safe and compliant鈥�
• 鈥楥ompliant tax efficient pay鈥�
• 鈥榃e only use HMRC compliant umbrella companies that are independently reviewed鈥�
• 鈥楺C approved鈥�

How these arrangements claim to work

Non-compliant umbrella companies use various arrangements to pay people for their services. The payments may not have tax deducted and could be through loans or payments sometimes described as:

• annuities
• fiduciary receipts
• credit facility
• shares
• capital payments or advances
• bonuses

Sometimes the umbrella company will ask the contractor to sign another agreement. This is as well as their employment contract. This could be with the umbrella company or a third-party entity or trust, based outside the UK.

This should not be necessary if earnings are fully taxed and is most likely to involve tax avoidance. This is because the contractor鈥檚 pay is being supplemented by an untaxed or undeclared amount, described as something other than earnings.

Find out more information about working through an umbrella company and how you鈥檒l be paid.

The risks of using these arrangements

Using an umbrella company that claims you鈥檒l be able to take home a higher percentage of your pay is very risky.

HMRC will always challenge tax avoidance arrangements. If you use a non-compliant umbrella company, you鈥檙e likely to be avoiding tax. You may end up paying extra tax, NICs and interest. You may also have to pay penalties on top of the fees to the umbrella company.

What you should do if you鈥檙e using these or similar arrangements

You should get independent professional advice, if you鈥檙e not sure whether your umbrella company is compliant with the tax rules. HMRC cannot tell you whether a comparison or broker website is promoting a legitimate umbrella company.

If you鈥檙e using or have used an umbrella company offering a high rate of income retention, you need to withdraw and settle your tax affairs with HMRC.

You should also report these types of arrangements to HMRC.

Find out more about how to identify tax avoidance schemes.