The government has issued a warning about agencies and umbrella companies that claim to be able to help you save on tax and boost your take home pay.

Although everything may look legitimate and above board, these companies actually run tax avoidance schemes that could land you with a bigger tax bill and penalties, HMRC said.

The ‘too good to be true’ schemes work in different ways, but operators usually promise to reduce your tax liability and help you keep more of your income.

The schemes usually involve some sort of loan or credit, which the operators say is not taxable. But there is no legal loophole here. The payments will always be subject to income tax and National Insurance Contributions (NICs), like any other income.

Most umbrella companies operate within the tax rules, offering an easy and hassle-free route into contracting. But unscrupulous arrangements are high-risk because you are ultimately responsible for paying the right amount of tax and National Insurance.

HMRC says that the ways in which these scheme operate can vary, but many follow a similar pattern.

First, you receive a small payment with tax and NICs deducted. At the same time, or shortly after, you also receive a larger payment without tax and NICs deducted. This second payment may come from overseas and on your payslip it may be referred to as something other than pay.

Even if a company claims that their scheme is 100% HMRC-compliant, you should treat it with suspicion and watch out for one or more of the tax authority’s red flags:

• If the company promises that you can keep 80, 90 or 95% of your wages. This is unlikely because the basic rate of income tax is 20% and NICs payments are due on top of earnings.
• Only a fraction of your salary is paid through payroll and subject to PAYE. This indicates that you are only paying tax on some of your income.
• You are paid using a loan, credit or investment payment that, the company claims, isn’t taxable.
• Payments are routed through several different companies before it comes to you.

If you are considering joining an umbrella scheme that meets any of these conditions you should consult an independent professional or HMRC.

If you think you are already in this type of arrangement, HMRC advices that you withdraw from it immediately and settle your tax affairs with HMRC.

Even if you are not aware that you are participating in a tax avoidance scheme, it may cost you in the long run. HMRC always challenges these schemes and you are likely to pay additional tax, NICs and interest. Penalties may also apply.

If you want to speak to someone about getting out of avoidance you should email: exitsteam.counteravoidance@hmrc.gsi.gov.uk.

If you are aware of these arrangements operating you can report them to HMRC.

For more information on compliant umbrella schemes, speak to a member of the Umbrella.co.uk team. Call: 0800 121 6513.