Umbrella Take Home Pay: Claims vs Reality

Well, if you believe what you read on the internet, umbrella take home pay can offer anything up to 91% of your earnings. Hooray I hear you cry, that’s wonderful! Unfortunately HMRC wouldn’t agree and if they come to discuss it with you. You probably won’t see your umbrella provider for dust. And you will probably be saddled with a very large tax bill!

85-91% Take Home

Let’s have a look at some of these schemes that promise 85%-91% take home pay – how do they work? This is going to be tricky; although operators of these schemes advertise all over the internet, their websites are not exactly forthcoming on how they work. They all say that they are compliant!. They all say that they have a QC opinion on the scheme and its effectiveness, they also have small print…very small print. For instance:

COMPANY X promises up to 90% of the umbrella take home pay which sounds great. Their small print states: “COMPANY X provides an information only service and does not provide advice; we act as an introducer of business.”

They claim that they liaise with ‘expert tax advisors from one of the top four tax accountancy firms in the UK to provide legal opinion.

Unfortunately, accountancy firms don’t always get it right! And if they don’t, it will be the tax payers who followed their recommendations who will suffer. In 2012, a tax scheme marketed by PWC (one of the big 4) lost a Court of Appeal hearing and was closed and those affected had to pay back the underpaid tax but also interest. The case in question, Howard Schofield v HMRC was described as being ‘artificial’ and with no purpose other than to avoid tax. Another scheme put together by Ernst and Young (another one of the big 4) and used by Greene King was blocked by HMRC in April 2013 which was labelled as ‘an attempt to create millions of pounds of tax relief out of thin air’. That’s the trouble with advice; you can take it by all means but just bear in mind that it won’t necessarily be right.

Self Employed working via an Umbrella?

Another solution, offering 90% take home pay, involves the umbrella company contracting with recruitment agencies for the supply of ‘self-employed’ consultants (sole traders). Unfortunately, recruitment agencies won’t deal with sole traders directly as, under the Income Tax (Earnings and Pensions) Act 2003, such arrangement could result in the agency having to ensure that PAYE and NI are deducted from payments made to contractors who are under the direction/supervision of the end client.

These rules are along similar lines to IR35 so, unless the worker is not under the supervision or control of the client, the scheme provider is obliged to pay them via PAYE and not gross (leaving them liable to make their own tax and NI contributions). This means that either a contractor is paying a scheme provider for doing nothing as, if they are not under direction/supervision of the client, they will be responsible for paying their own taxes and NI contributions through self –assessment. Or, if they are under direction/supervision of the client; their taxes are not being calculated correctly and they could be liable for a big bill from HMRC at a later date.

In the contracting world trusts have always been very popular with scheme providers who promise 80%-90% take home pay, mainly because they charge 8-12% of the contract value (over £1,000 per month on £450 per day).

The schemes operate like this… Basically, they pay a small monthly retainer on which you will pay tax and NI contributions. The balance of the contract value will then be paid to a trust from which you can apply for loans upon which tax is only payable when the loan is repaid or written off. In theory it won’t ever be repaid! It won’t ever be written off and, bob’s your uncle, you don’t pay any tax.

However, HMRC cottoned on to this a few years ago. Now users of this type of scheme are being systematically investigated and receiving demands for unpaid tax, interest and penalties.

Employee Benefit Trusts

The scheme operators typically used Employee Benefit Trusts. These have been found to be wholly artificial when operated for contractors. But we are now seeing Contractor Benefit Trusts being operated. These appear to work in exactly the same way, so no doubt HMRC will be moving onto them soon enough.

Contractors fall for high umbrella take home pay claims.

Popular contractor website, ContractorUK, has attracted many people who have used this type of scheme. Most are now facing crippling bills from HMRC – you can read some of their comments here.

Be warned, these threads don’t make very pleasant reading. Many contractors were attracted to adverts for 80%-90% take home pay. The schemes have failed and the individuals are facing bankruptcy, losing their homes, family breakups, depression and despair. If it seems too good to be true then it very probably is!