Why 90% take-home pay rates for contractors are too good to be true

No-one likes paying taxes and talking about taxes isn’t exactly interesting but, if you’re a contractor, your taxes are more important than ever thanks to changes with IR35.
A few years ago there was a lot of publicity about aggressive tax “management” schemes (some more legal than others) so the government made various legislative changes and, by and large, the companies running less than legal schemes disappeared. Since the public sector IR35 changes came into effect the number of umbrella companies running schemes to maximise take-home pay has steadily increased. When the IR35 changes are extended to the private sector as well this is only going to get worse.
No-one wants to pay more tax than they have to, and it can seem very tempting to use an umbrella company that is offering you 90% take-home pay. I know of one contractor who was paying less than 5% in tax and NIC and fees despite earning over £100k per year. For IT contractors in particular we are talking huge differences in money, but it’s honestly not worth the risk. Did you know that each quarter all recruitment agencies are legally required to report to HMRC how much money they’ve paid your umbrella or limited company on your behalf? (Have a look at my article about ITEPA here) Eventually HMRC will figure out that you’re putting a £10k salary through PAYE but we’re declaring payments of £100k, and when they do they will be looking to reclaim the unpaid tax and NIC. As the 2019 Loan Charge has shown the tax bills received by contractors can be retrospective and cripplingly large!
The important thing to remember is that your take home pay should vary very little between umbrella companies. Most people can no longer claim for travel & subsistence costs and the amount of Tax & NI due will remain the same through all complaint umbrellas. The only difference is in the fees the umbrella company charges.
All umbrella companies will make the following deductions:

  • PAYE tax
  • Employee’s NIC
  • Employer’s NIC
  • Apprenticeship Levy (if they are eligible)
  • Their margin

Things to look out for and avoid:

  • Any claims that an umbrella company can save you tax or national insurance – there is no legal mechanism to do this
  • Any company offering two types of payment scheme, one with significantly higher take-home pay
  • Any company claiming to be HMRC or government approved – HMRC don’t do that
  • Any company that will pay you in two separate amounts, from different bank accounts or via a loan scheme
  • Any company that does not declare all of your salary on your payslip, or doesn’t send you your payslips

So how do you know if an umbrella company is compliant?
Here at Corriculo we’re proud to only work with umbrella companies that are accredited by the FCSA, APSCo, REC or Professional Passport. These companies have been independently vetted and audited to ensure their compliance with all relevant legislation and guidelines. The great news is that there are over 40 companies that you can choose from, and you can be assured there will be no nasty surprises further down the line. As more and more contractors fall within the scope of IR35 and start to use umbrella companies, it’s great to know there’s a simple way to ensure your payroll provider is fully compliant.
If you’re looking for a new umbrella company then you can find the lists of accredited companies here:
APSCo – https://www.apsco.org/group/umbrella-17.aspx
FCSA / REC – https://www.fcsa.org.uk/members/
Professional Passport – https://www.professionalpassport.com/Contractors/Approved-providers/197