Contractor Loan Schemes: Think Twice Before Signing


No one enjoys having deductions especially taxes on their pay slips and would do anything to minimize them. As a result, many employees working under agencies and umbrella companies are turning to contractor loan schemes to bail them out of the tax burden. Contractors happen to be the easy target for such schemes.

The schemes seem to be a very lucrative deal as you may end up with a more significant proportion of your pay in your pocket. But as much as it glitters, the inside of the deal is not all golden. Consequences of taking the deal may dig deeper into your pocket than you could imagine.

What They Say

The promoters of these contractor loan schemes, also known as disguised remuneration schemes take advantage of people’s perception about tax. They thus promise you a 90% take home pay which I must admit is very tempting. Usually they will advertise themselves based on approval by the HMRC, which is a lie, to stop you from contacting HMRC. They refer to the payment as a loan or credit to make it sound non-taxable, and they claim to help you reduce the paperwork.

How they operate

These payments are the ordinary incomes and thus are subject to taxation and National Insurance contributions. Most of these companies will pay you a small portion of the salary as PAYE income then pay the remaining amount separately as a “loan.”

According to HMRC, umbrella companies employ contractors to hire people on behalf of the main client. During payments, the primary client would send the agreed amount to the umbrella company who then sends it to the contractor less a 10% fee. The salary paid meets the national living wage but falls below the tax and National Contribution Insurance limits. The balance is what is offered as a loan.

Reality and Consequences

HMRC categorises such loans as national income and should be taxed just like any other income. Unlike what the promoters say, you must declare any contractor loan schemes to the HMRC and HMRC will never approve of any schemes that intend to evade tax. All users of these schemes have been given a deadline of up to the 5th April 2019 to sort out the terms of the loan. After the deadline, there would be an investigation and the users will have to pay loan charges, pay the due taxes and penalties that HMRC will deem necessary.

Be warned that, these schemes may result in loses bigger than what you would have otherwise paid. The promoters argue that the schemes are law compliant, and even back their arguments by a Counsel’s opinion. However, these claims might be misleading as HMRC has a good record on tax evasion cases have won almost 80% of the cases regardless of the Counsel’s opinion. The claim that the taxes, penalties, and interests are all insured is also invalid.

You can view further information on disguised remuneration here.

In our company, we offer transparency to both contractors and recruitment agencies, and we deduct the stipulated taxes and national insurance. It is better to pay taxes willingly compared to being compelled to pay a more substantial amount in future or face serving a jail term for tax evasion.

Speak to one of our specialists for further information and advice.

Written by: darlia