NOT AN UMBRELLA PAYROLL COMPANY

Although Genius don't offer Umbrella Payroll Services as we strongly believe that the process is unethical; we explain below what 'Umbrella Payroll' is;

Unfortunately all Payroll companies have been nicknamed 'umbrella payroll companies' because of a large number of payroll companies offering a process called 'umbrella', whereby you are entering into an arrangement to be paid in the form of artificial 'non-taxable' investment payments, grants, loans, credits and so on.

Umbrella payments are very likely to be tax avoidance and is extremely high risk! You could end up paying far more than just the tax owed back to HMRC.

Spotlight 54 Find out about the tax avoidance schemes being used to target workers returning to the NHS to help respond to the Coronavirus (COVID-19) outbreak.

WHAT IS AN UMBRELLA COMPANY?

An umbrella company is a business that acts as a third party between a contractor and an employee. The contractor outsources its payroll functions to the umbrella company, which handles the pay of the employee and makes any necessary tax deductions. These sorts of arrangements are being commonly used in sectors such as the construction and hospitality industries where large numbers of temporary workers are required to work on short-term projects.

The use of umbrella companies is completely legal. However, a spokesperson for Her Majesty's Revenue and Customs (HMRC) said: "It is illegal for workers to pay the national insurance contributions of employers and HMRC cracks down on any abuse of PAYE rules."

Umbrella Payroll Payslip example

WHAT THESE TAX AVOIDANCE SCHEMES LOOK LIKE

Usually, the wages will consist of 2 payments to you:

  1. the first payment is declared as earnings and will go through the umbrella company payroll, often at around National Minimum Wage levels or a flat rate payment for example, £100 per week
  2. the second payment, that the umbrella company will claim is not taxable - this payment may be described as a loan, annuity, shares, a capital advance involving mutual, joint or co-ownership, or a payment derived from a revolving line of credit facility, or some other non-taxable form

All of these schemes have one thing in common and that is to attempt to disguise the true level of your earnings, which would ordinarily be subject to Income Tax and National Insurance contributions.

Some umbrella companies may offer vague explanations of how the schemes work, for example, using your personal allowance more efficiently, and often claiming that you can take home 80% to 85% of your pay.

The pay slips provided by the umbrella company may also be misleading, they may show one or both of the following:

  • the first payment only
  • inaccurate deductions

If you are asked to sign documents other than your contract of employment, you should think very carefully before signing up. You should challenge the position if you are asked to sign separate agreements to receive loans, advances, shares, annuities or anything else not relevant to your work.

Even if you don’t realise it, these schemes are very likely to involve tax avoidance and you could end up owing tax and interest, as well as incurring the fees paid to the umbrella company.

STEPS TO PROTECT YOURSELF

  • Avoid umbrella companies or recruitment agencies that are promising you an 80%, 90% or 95% take home of your wages. This is unlikely to be tax compliant; the basic rate of tax is 20%, whilst you also need to contribute National Insurance as well.
  • Check if all of your salary is being paid through payroll and subject to PAYE. If not, then this indicates that you are only paying tax on part of your income.
  • Do not agree to be paid using loans, credit or investment payments. Many non-compliant companies will claim this isn’t subject to income tax or National Insurance, this is not true and is considered tax avoidance
  • Make sure that payment from your umbrella company is not routed through various companies before it comes to you.

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