Updated 13/12/2018. As a contractor or freelancer, the two most popular payroll options you have are to set up your own limited company or work through a PAYE umbrella company. However with so many providers of payroll services available, how do you know which one to use and who is compliant? It’s important to do your research and ensure the provider you ultimately choose is compliant and legal – otherwise the repercussions could be devastating.
As a freelancer or contractor, it is likely you will set up your own limited company or work through a PAYE umbrella company. However, with so many providers of payroll services available, how do you know which one to use? Whatever your decision, make sure the company you use to take care of your payroll is reputable and compliant, or the repercussions could be devastating.
What are your payroll options as a contractor?
The two most popular payroll options chosen by contractors are operating through a limited company (often referred to as a personal service company) or using a PAYE umbrella company. Every contractor’s circumstances are different and depending on their salary, hours, contract length and preferences, one option may be far more suitable to one contractor than the other. However, regardless of the payroll service you choose, you must ensure they are reputable and fully compliant with HMRC legislation.
Tax avoidance could come back to haunt you
Using a tax avoidance scheme is certainly a massive risk and one that we strongly advise against. Some dodgy agency PAYE and umbrella company schemes claim to offer legitimate and tax-efficient ways of retaining more of your wages – be very wary of these arrangements as they could be tax avoidance. They will boast about being able to guarantee you 80, 90 or even up to 95% wage retention if you use their scheme. Whilst legal tax planning through a limited company can sometimes result in a higher take home pay, this simply is not possible through compliant PAYE schemes.
If your payroll arrangement is agency PAYE or an umbrella company, all of your income is taxable which means that it is subject to 20% income tax at a minimum – as well as National Insurance Contributions (NICs). Therefore it is impossible to keep even 80% of your wages through a compliant payroll arrangement. Companies offering these over the top rates of take home pay are most likely operating a loan or credit scheme.
HMRC says they will always challenge such tax avoidance schemes, which will ultimately cost the taxpayer in income tax and NI bills, as well as interest and penalties. Ultimately, you are responsible for your own tax affairs and whilst HMRC will work to shut down such non-compliant schemes, you could still face tax bills in the future if you were underpaying tax through one of the above schemes.
Many contractors who used loan schemes as far back as 1999 are now finding they are facing charges if they do not settle their tax affairs with HMRC.
You can find more information on identifying tax avoidance schemes, including how to leave a non-compliant scheme on the UK government website.
Non-compliance in the industry
There is an array of companies operating unethically and unlawfully that are targeting contractors who may not know any better – especially those who are new to contracting.
Such schemes include the aforementioned loan and credit schemes as well as job board schemes. These tax avoidance arrangements involve a contractor receiving a minimal salary paid into their bank account from an umbrella company in order to reduce the tax and NICs. The rest of the salary is paid to a third party job board where the contractor’s skills are advertised. The contractor will earn credits for their listing and these are exchangeable for tax-free cash. Therefore the contractor is receiving the rest of their salary without paying tax or NICs, thus the scheme is tax avoidance in the eyes of HMRC.
HMRC has warned of a similar scheme that also involves contractors receiving a split salary consisting of low pay, and the rest being paid to them as a “capital payment” for a deferred annuity (tax-free).
Find out more about tax avoidance schemes being investigated by HMRC.
Find an established, trustworthy accountancy and payroll provider
Despite the myriad of non-compliant payroll and accountancy providers in the UK, there are still many trustworthy options out there. What you need to look for are well-established providers with accreditations from reputable firms such as Professional Passport. You can also check the APSCo list of providers – these payroll providers are audited and vetted to ensure their compliance.
Be cautious of firms that have popped up in the last couple of years and whose websites don’t contain much information. Companies that are shut down due to dodgy arrangements can tend to pop up again under a different name but with the same directors. You can check Companies House to find out this information. If you cannot find the name of the company you are researching, it is possible they operate under a different company name than their brand name (not illegal) or potentially are a company in the Isle of Man or Guernsey – which could mean its an offshore arrangement.
Churchill Knight & Associates Ltd is a Professional Passport accredited provider. Established in the UK in 1998 as a family-owned business, Churchill Knight advises contractors and freelancers of their legal payroll options including limited company accountancy and umbrella company PAYE. From its office near London, the team of specialist contractor accountants has helped over 20,000 contractors get paid on time – and always in full compliance with all HMRC legislation.
To discuss setting up a limited company or join an umbrella company, or if you are looking to switch providers, please call 01707 871622 or request a callback to discuss your options. We’ll help you learn to spot non-compliant schemes and help you choose the right payroll option for you.
