EXPERT SERVICES

FOR THE RECRUITMENT INDUSTRY

How to avoid working with non-compliant umbrella companies

Reputable umbrella companies provide a crucial service for contractors who want the flexibility of working on different contracts but need the security of having an employer or are working on a contract which demands the services of an umbrella company. But, because the industry is unregulated, non-compliant umbrellas can put contractors at risk of tax avoidance.

In this article we discuss how contractors can avoid working for a non-compliant umbrella company.

What are the risks of working with a non-compliant umbrella?

The main risk of working with a non-compliant umbrella is that some umbrella companies operate tax avoidance schemes. By luring contractors with terms such as “tax efficient,” dishonest umbrella companies then go on to claim they can reduce your tax liability. The danger is that the contractor is responsible for paying the right amount of tax, and if you are found to have not paid enough tax you are at risk of paying additional tax, interest, and perhaps further penalties. What’s more, many of these companies also charge high, non-refundable fees, which is a further expense.

How does it work?

Working with an umbrella firm is slightly different to working with a regular employer. The umbrella company invoices the end-hirer for the work the contractor has carried out, this is called the “assignment rate.”

The assignment rate includes all the associated employment costs which are deducted from a contractor’s final gross salary. Employment costs include things like admin costs, employers NICs, employers pension contributions, Apprenticeship Levy, and holiday pay.

The contractor’s gross salary is then subject to national insurance and income tax. 

Dishonest umbrella companies might take advantage of the confusion around employer costs and the different way of being paid and say that you can keep more of your income. They might tell you that certain payments they make are non-taxable, because they are paying you in a different way. Some of the things that umbrella companies might claim the payment is include loan, credit, grant salary advance, capital payment, annuities, profit shares and bonuses.

How do they make payments?

If you are subject to a tax avoidance scheme you will usually be paid a small amount first which is listed as being subject to income tax and NI contributions. You then might be paid a second amount which is listed as being not liable for tax. This payment might have come from a different account, often an overseas account. 

How to avoid non-compliant umbrella companies?

There are certain things to look out for which will help you spot tax avoidance schemes:

  • Any company that claims you can keep 80-95% of your income and be tax compliant. This is impossible as the minimum income tax rate is 20% plus NIC.
  • Payments where only a fraction of your salary comes through payroll, and any payments listed as loans or other payments which are not subject to tax or NIC.
  • Any payments to your bank account which are not listed on your payslip.
  • Your payment does not come directly from the umbrella company and instead is routed through other companies first. Some of these might be offshore.
 

No reputable umbrella company will offer to reduce your tax bill. If you are concerned that you might be using a tax avoidance scheme, contact HMRC as soon as possible to help you settle your tax bill.

By working with a compliant umbrella company, you are protecting yourself from tax avoidance and costly penalties. If you’d like further information about how JMK maintains compliance, don’t hesitate to get in touch.

HOW JMK CAN HELP YOU

Since 2002, JMK have been compliantly consolidating back-office, accountancy and payroll functions. 

We have evolved to provide a range of expert services; such as Back Office Support (BOS) or Funding, becoming a leading provider to the contracting industry.

We know every agency is different in some shape or form, even if only by a little, but important bit. Combining our knowledge and experience of multiple sectors enables JMK to support you all from recruiters and payroll, through to finance, compliance and management.

With JMK as your trusted partner, even the smallest team can process the largest payroll, regardless of payroll type.

Have a look at the wide range of services our Back Office Support (BOS) or Funding can provide to you and your business, it is far more than just payroll and finance.

Don't miss your Free Reports

Complimentary payroll comparison report
Play Video
Complimentary financial forecast report
Play Video

INDUSTRY UPDATES

Join our free iPhone 15 Giveaway!

If you are a recruitment agency and interested in a chance to win a FREE iPhone15, please click the button below.

Please note that this giveaway is only applicable to recruitment agencies who place temporary or contract candidates.