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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.

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.

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. 

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. 

Calculations

A contract pays £21 per hour. You worked 160 hours for a job that started on 6 April 2021, your Gross Pay is £3,360 and you have no other employment. You are based in England and therefore your personal allowance is £12.570 for 2021/22, and your Tax Code for PAYE is 1257L.  

Gross pay 3360  
PAYE 434.40 Deductions are as calculated below  
Ees NICs 361.97
Net pay (take home)  2,563.63  

 

You can go to HMRC's PAYE calculator to check what you should be paid.

Employee tax code: 1250
Period of pay: Monthly
Is it on a month one basis: No
Pay this month: £3,360.00
Previous total gross pay to date: £0.00
Previous total tax due to date: £0.00
Previous tax not deducted due to regulatory limit: £0.00
Payment Date: 30/04/2021
Month Number: 1
Pay adjustment: £1,042.43
Total taxable pay: £2,317.57
Total tax due this period: £463.40
Regulatory limit: £1,680.00
Tax due at end of current period: £463.40
Tax not deducted due to regulatory limit: £0.00

 

Scottish taxpayers need to use the Scottish version of this calculator: they are subject to different tax bands than those in England. Then you can go to HMRC's NICs calculator and work out your due Employee NICs.

Period of pay: Monthly
Gross Pay this period: £ 3360
NICs Category Letter: A
Lower earnings limit  £ 520
Earnings above the lower earnings limit up to and including the primary threshold £ 277.00
Earnings above the primary threshold up to and including the upper earnings limit  £ 2563.00
Employer's NICs   £ 361.97
Employee's NICs due - £ 307.56
Total of Employee's and Employer's NICs due £ 669.53

 


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