HMRC, the tax authority under the Labour government, has issued a stark warning to individuals working through umbrella companies, highlighting the prevalence of tax avoidance schemes that promise higher take-home pay but often result in significant tax debts.
Red flags on payslips
According to HMRC, many workers are lured by promises of increased take-home pay, only to discover later that they owe thousands of pounds in unpaid tax, interest, and potentially penalties. Tell-tale signs of a scheme include money deposited in a bank account that does not match the figure on the payslip, as well as so-called “untaxed payments.”
HMRC emphasises: “Understanding how you’re being paid is the best way to make sure you aren’t using an umbrella company that is operating a tax avoidance scheme. Checking your payslips and contractual arrangements will help you confirm you are paying the right amount of Income Tax and National Insurance.”
Tools and guidance available
The tax authority offers a free online tool to help workers calculate what their pay should be when employed through an umbrella company. Additionally, HMRC provides a payslip guide to clarify what a legitimate payslip should look like. The agency also maintains a published list of named tax avoidance schemes for workers to check.
HMRC advises: “Whether you already work through an umbrella company or are thinking of signing up, you should check the tax avoidance schemes we’ve named. If you’re a contractor, you may be employed through an ‘umbrella company’. If you’re not sure, it’s best to check as some umbrella companies try to break the tax rules. You may be at risk. But if you understand how umbrella companies work, you can take steps to avoid these risks.”
Reporting tax avoidance
HMRC encourages anyone who has been encouraged to enter a tax avoidance scheme, or who is aware of such a scheme, to report it. Reports can be made anonymously via an online form, using the code “TAC”. Alternatively, individuals can phone HMRC on 0800 788 887, or from outside the UK on +44 (0)203 0800 871.
