90% pay rate…too good to be true?

For a lot of contractors, the number one priority is being able to keep as much of their pay rate as possible. Who wouldn’t? All the work you do, of course you want to keep as much of that hard earned cash in your pocket.

Unfortunately, quite a few contractors fall into the trap of joining an umbrella that provides ‘90% pay rate’ without realising that this may cost them more in the long run, as well as fall foul of the HMRC. We’ll explain exactly how they get you ‘90%’ and the reasons how it can get you into serious legal bother and out of pocket.

Umbrella or Loan?
Let’s clear this one up first – these companies that offer high pay rates are not technically an umbrella. They act more as a loans company, since they are not putting themselves as your ‘employer’ so you don’t receive all the common workplace securities when you join an umbrella. This is also how they get round the whole tax conundrum (more on that later).

An umbrella company acts as your ‘employer’ – so they essentially take all the necessary precautions to make sure you’re protected in the workplace by reviewing your contract, calculate your tax correctly so you’re not caught in the thunderstorm that is IR35 and in most cases provide insurance for peace of mind.

A contractor loans company takes no responsibility when it comes to protecting you and your interests. This brings us onto exactly how they manage to get you such a sweet deal on your pay rate.

The ‘No Tax’ smoke and mirrors
The reason you’re getting such a high pay rate is because you are not directly receiving ‘pay’ from these companies. They push the funds through a chain of different companies or trusts, so that the money you are receiving is registered as a loan, and therefore it is not counted as income. The loan companies will tell you with great pleasure that as it’s a loan, there is no tax to pay and it’s all completely legal.

Put simply, it’s not. As you are not paying the loan back, it won’t be seen as a loan by the HMRC so it’s no different to normal income. The HMRC have published an article on these loans companies (link to the page is here). If you get caught, you’re looking at some hefty fines, an additional tax bill and penalties.

The tell-tale signs of a deal that’s too good to be true
Here’s a handy list of the statements and promises these high-risk loan companies tend to use and offer.

‘You can get 90% of your pay rate’ – ever heard the saying ‘if it sounds too good to be true…’ Always ask colleagues or friends who use umbrellas. Are they using the same company? Get some good independent advice. At Appytech, we’re more than happy to have a chat and see what option is best for you (even if it isn’t with us!).

‘Fully HMRC compliant and approved’ – The HMRC don’t approve any type of scheme (that would be seen as an endorsement). It’s likely that the company has a reference number but that’s for investigative purposes, which allows the HMRC to dig into the records of those using these companies.

‘No need to declare the scheme’ – Another false statement. Miss out any scheme reference number on your tax return and you could be looking at a significant penalty.

Have a chat with us…
If you’re currently using one of these loan companies and are a little confused or just need to talk to someone about your current situation, let us help. We’re not here to persuade you to join us, just give some impartial, sound contracting advice.