Contractors, higher take-home pay is a bad basis to change up your umbrella company

As an IT staffing business that was founded by five recruiters of contractors, we naturally focus heavily on the supply of technology contractors, writes Matt Collingwood, managing director IT recruitment company VIQU.

With our combined experience, we’ve seen and heard it all. However, in the last few months, even our well-seasoned team has been shocked by the unprecedented number of requests from contractors operating as umbrella company employees who want to switch -- mid-contract -- to an alternative umbrella company. Ordinarily, we might receive one such request per month and more often than not, it would be related to unsatisfactory service with the umbrella company. Yet, in the last month alone, we have had nine umbrella contractors asking to switch! 

‘I can take home a lot more with another umbrella.’ But you can’t; not lawfully

The vast majority of times with this flurry of requests to jump brolly, we get the following explanations:

“I’ve got a better deal” or, more specifically, more worryingly:

“I’ve been told they will increase my take-home pay.”

As nice as that would be given the cost of living crisis continues, take-home pay really can’t suddenly inflate if you want to stay within the law. In the UK, tax is tax. If a company claims that you can keep 80-95% of your income and be tax-compliant, they are simply lying to you.

Contractors, it is numerically impossible to take home such a high proportion of your income, as the minimum income PAYE tax rate is 20% + national insurance.

As some umbrella companies are correctly pointing out online, the only element that can impact your overall take home pay – lawfully – is the weekly fee that umbrella company charges, and whether they base the calculation on 48, 50 or 52 weeks. But of course, contractors are not going to work 52 weeks of the year. Most companies will be shut during the bank holidays and Christmas period, and everyone needs to take time away from work occasionally.  

Why are we seeing an increase in ‘I’m an umbrella contractor get me out of here’ requests?

With inflation at a 40-year high and the cost of living hurting while energy bill support from the government remains opaque for some and inadequate to others, it’s perhaps little wonder that umbrella companies focussed on take-home pay are on the up. But such take-home pay promisers really are offering nothing more than tax avoidance solutions. Well maybe something more – potentially a lot of your time and money spent on HMRC!

Despite ContractorUK readers tending to being very switched on, in the nine requests across my desk in the last two weeks, when we probed, eight out of the nine contractors did not grasp the basic mechanics behind how the higher take-home is achieved. And even the 9th contractor who had an idea, admitted that they did not understand the legal implications. Unsurprisingly, we rejected all nine requests due to non-compliancy and liabilities – for both our agency and the contractors.

IMPORTANT: Understand what you’re getting into, because HMRC is on the prowl

In the past few months, I have spoken with three contractors (in addition to the nine) who have had HMRC contact them about umbrella companies that they used to work through, with a view to assessing unpaid tax. I know of one contractor who has unfortunately now lost his home, such is the scale of his unpaid tax liability. Almost needless to say, salary payments made as loans is something he’ll never touch again, not even with a bargepole.

Crucially, while dodgy brollies (by which I mean tax avoidance arrangements posing as bonafide PAYE umbrella companies), and the number of contractors who use them, appears to be increasing, the net is tightening around non-compliant umbrella companies.

In fact, HMRC is now utilising its new legal powers to ‘name and shame’ tax avoidance scheme companies; avoidance promoters/ suppliers and their individual directors for the first time. While the corresponding list had a slow start, there are now at least 17 different entities that HMRC is urging contractors to withdraw from. The tax authority last month also published Spotlight 60; spelling out for workers the “tax avoidance arrangement used by some umbrella companies.”

Quick queries to ask to help contractors spot a tax avoidance scheme

Busy contractors can pose the following brief questions to help detect which operators ought to be avoided, and which look like genuine umbrella companies safe to use:

• Does the company claim you can keep 80-95% of your income and be tax compliant? This is impossible as the minimum income PAYE tax rate is 20% plus NI.
• Do you receive payments where only a fraction of your salary comes through payroll, while other payments are listed as loans or other payments which are not subject to tax or NIC?
• Do you get payments to your bank account which are not listed on your payslip?
• Does your payment not come directly from the umbrella company, but instead is routed through another company first? Possibly offshore companies?

A ‘yes’ reply to any of these four is, hopefully obviously, not the reply (or umbrella company) that you’re looking for.

What the taxman says...

Contractors might like to know that the guidance from HMRC states:

“Most employment agencies and umbrella companies operate within the tax rules. However, some umbrella companies and agencies promote arrangements that claim to be a ‘legitimate’ or a ‘tax efficient’ way of keeping more of your income by reducing your tax liability. These arrangements leave you at risk. This is because you are ultimately responsible for your tax affairs and for paying the correct amount of tax and National Insurance contributions. These types of arrangements are likely to result in you paying additional tax, interest and perhaps penalties, and are never HMRC approved.”

While that guidance seems pretty clear to us, some contractors feel like they are being victimised or unfairly treated by recruitment agencies that refuse to allow you to choose your own umbrella company or switch to a different umbrella company mid-contract.

That said, there are indeed agencies out there today that are only looking out for number one!

Don’t forget though, dodgy umbrellas (avoidance arrangements posing as umbrellas) can and will impact all contractual and involved parties, not just you.

Finally, asking umbrellas, accreditation, and asking yourself

In closing, and to keep safe, contractors should ask the four questions outlined above where there is doubt about the umbrella they're approaching, or who has approached you. And lawyers are right to point out that while accreditation does not provide any guarantee of compliance, ensuring the umbrella company you work through has FCSA or Professional Passport accreditation is usually a good start.

Last but not least, trust your gut! Although it might be tempting to choose the higher take-home umbrella, ask yourself if the future repercussions are worth it. Be in no doubt, if it looks or sounds too good to be true, it invariably is.