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Be sure of the facts before you sign on the dotted line – HMRC Spotlight 45

Updated: Jan 18, 2019

We would all like to increase our take home pay, but before you sign up with an umbrella that is seducing you with rates of 80 or 90% you need to question how those rates are being achieved.


In August, HMRC published Spotlight 45 which focuses on the dangers contractors could face when entering into such schemes which include being personally liable for their own tax and National Insurance Contributions (NIC) and potentially interest and severe financial penalties.


There are many ways in which unscrupulous umbrellas achieve the high levels of take home pay but in all cases you will be told that some element of the payments being made to you are tax free.


Generally speaking, these schemes will work in the following way:

  • You will be paid a small salary from which tax and NIC are deducted.

  • At around the same time as you receive your salary you will be paid a larger amount which has had no tax or NIC deducted.

  • The second payment may be made to you from a different bank account to the first, or even originate overseas.

  • Your payslip will show the larger payment as a separate amount and call it something other than salary, possibly a loan. Importantly there will be no tax or NIC deducted from this element of your pay.


So what should contractors look out for to identify risky schemes? In Spotlight 45 HMRC outline four key factors you should check;


  • Does the company promise that you can keep 80, 90 or 95% of your wages and be tax compliant? This is unlikely to be true as, in most cases, the basic rate of Income Tax is 20% and National Insurance contributions are also due on earnings.

  • Is just a fraction of your salary paid through payroll and subjected to PAYE? This indicates that you are only paying tax on some of your income.

  • Are you paid using a loan, credit or investment payment and the company claims this isn’t subject to income tax or National Insurance contributions? If so, this is tax avoidance.

  • Is the payment from your umbrella company routed through various companies before it comes to you?

Unscrupulous companies may tell you they are compliant with tax rules and may even say they have HMRC approval, but you should be wary of this. They will try to hide the fact that they are involved in tax avoidance and brush over details when explaining their offering to you. Previous users of avoidance schemes have regularly been told that the arrangements were HMRC compliant but later found out, to their cost, that this was not true.


These are high risk schemes.


HMRC will always challenge tax avoidance schemes.


If you are involved in an arrangement of this type you are highly likely to be found to be avoiding tax and you could end up paying additional tax, NIC, interest and penalties.


So how do I make sure that the umbrella company I sign up with is legitimate?

No legitimate umbrella company will offer a promise of increased take home pay or reduced tax liabilities, so you should avoid any company that does.


Turning to an umbrella which is a member of one of the independent professional organisations will give you some comfort that the umbrella you have chosen is legitimate and that it is compliant with HMRC regulations.


How can The Contractor Co-op help?

The Contractor Co-op welcomes the publication by HMRC of Spotlight 45 and the highlighting of bad practice in the contractor market.


Compliance is fundamental to The Contractor Co-op which was born out of a vision to create a safe environment in which contractors can operate. We place emphasis on ensuring that everything we do is clear and fully explained to you, placing you in control.


If you have any questions or would like to talk to us about becoming a member of the Contractor Co-op please get in touch. Either call us on 020 3468 0009 where we can talk through your individual situation or send us a message to info@contractor.coop.


We look forward to hearing from you.

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