If you obtain contract work via an employment agency you could find yourself accidentally caught up in an illegal tax avoidance scheme. If you are not a tax expert you might have little idea how agencies should be accounting for tax and National Insurance on their payments to you. HMRC has now created a basic tool to help you detect whether you are in an illegal scheme. 

Let's have a look at an example of a monthly payslip to illustrate some of the issues.

For example, you have been recruited by a staffing agency and you agree to work on a fixed-term contract that pays £21 per hour. You worked 160 hours on a job that started on 6 April 2021, your Gross Pay is £3,360 and you have no other employments.

We would expect that your April 2021 payslip would show deductions and net pay as follows:

Gross pay £3,360.00  
PAYE £   434.40 Deductions are as calculated below  
Employee NIC £   361.97
Net pay (take home)  2,563.63  

 

If the agency has promised that your take-home pay is going to be more than shown, the chances are that something is wrong.

The calculations to arrive at the payslip above are in the Calculations tab.

Warning! If your payslip looks more like this, you should be concerned:

Gross pay 1,000
Loan/contribution/travel expenses/[some other description]  2,260
PAYE 0
Employee NIC 24.36
Net pay (take home)  3,235.64


As you can see part of your gross pay is now called 'Loan/contribution/travel expenses/[some other description]' and that part of your pay is treated as being tax-free.

The agency may suggest that you use an Umbrella company or it may suggest some other variation or scheme which will supposedly give you higher take-home pay. They will very probably explain that the scheme is legal (when it is not).

HMRC published a tax Spotlight: ‘Umbrella companies offering to increase your take-home pay recently. This highlighted the fact that many employees and self-employed contractors are failing to realise that some staff agencies and umbrella companies are flouting tax anti-abuse rules.

  • If so, you will be sent some extra paperwork which provides some kind of agreement or details about the Loan/contribution/travel expenses/[some other description]. If that comes from a non-UK source, then that is potentially a bad sign. It is unwise to sign any agreement unless you are 100% sure about its legality. Also, check that you are not being charged extra fees for this 'service'.
  • If there is any mention of a loan or tax-free contribution, it's likely that you are party to a Disguised Remuneration-type scheme.

In terms of any deduction for Travel Expenses, it is unlikely that any of your home to work travel or daily subsistence is tax-deductible because you are on a fixed-term contract.

  • Even if you are on a zero-hours agency contract, the fact that it's an agency contract, the Employment Intermediaries Travel rules will in most cases prevent you from receiving tax relief on the costs of commuting.

In this example, you are avoiding paying any Income Tax because only £1,000 of your earnings is being processed as taxable income and the balance of £2,260 is not treated as Gross Pay. 

  • You can earn up to £12,570 per year tax-free (in 2021/22). This is your personal tax allowance. That is £1,047.50 per month, which is more than your so-called Gross Pay of £1,000 and no tax is due.
  • You have a low employee NICs liability because you pay NICs on earnings above £184 per week, (c.£798 per month).

If you are not being fully taxed on the amount of pay that you have earned (in this example, that the £3,360), the chances are that your agency or the agent running the payroll is operating an illegal tax-avoidance model.

If you are the victim of this type of agency and you have signed up to agree to a contractor loan or whatever the agreement is called, HMRC will be able to come after you for the missing tax deductions. In this case, that is £772.01 per month. This could be expensive if this goes on for several months.

HMRC provides an Interactive Tool for Contractors and this should help you to work out if you are at risk of tax avoidance. 


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