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You’re not an accountant. All you know is that a company has promised to place you on its payroll and ensure you get 95% of your earnings. If that’s you, it’s probably time to change your payroll arrangements, fast.

Last month, we reported on the legal fight between BBC newsreaders and the corporation over the way it ‘encouraged’ them to set up personal service companies as a tax avoidance scheme.

But it’s not just BBC employees who’ve found imaginative ways of being ‘off-payroll’. If you’re a supply teacher or a locum doctor, nurse or social worker, chances are you’ve been approached by companies offering to manage your financial affairs, take you onto their payroll and ensure you receive 85%-95% of your earnings. What’s more, they’ll tell you, it’s all entirely legal.

Except it may not be.

Off payroll and offshore

As The Times recently reported, many of these schemes are operated by umbrella companies who pay a small proportion of your wage (usually enough to keep you below the tax threshold) as payroll earnings and the rest as ‘loans’ (which you never actually repay).

The companies running such schemes operate overseas and use a number of names to fool investigators. But now HMRC has caught up with them and as many as one in ten are now under investigation. If you’re enrolled in such a scheme, you could face a hefty bill and fine comprising the tax you owe and a fine of equal amount. For many, that could be enough to see them lose homes and enter bankruptcy.

Not all schemes are equal

Muddying the waters still further is the fact that some schemes are legitimate (albeit they tend not to offer 95% of your income tax-free). So how are you supposed to tell the good from the dodgy?

There are some simple rules of thumb. Tread very carefully if your financial affairs company…

  • Operates from abroad
  • Uses loans to reduce your tax liability
  • Promises that you’ll receive 95% of your salary (no legitimate scheme can offer that)
  • Doesn’t pay 100% of your income via payroll

Ignorance no excuse

When it comes to matters of tax avoidance, many of us rely on financial advisors. Their confirmation that everything is above board is often all you need to convince you to sign up to schemes that frequently aren’t what they appear to be.

Yet despite that, the buck stops with you. The Times reports Julia Kermode, chief executive of the Freelancer and Contractor Services Association, as saying “You are responsible for ensuring that UK tax and national insurance contributions are paid on all of your earnings. We should all know this.”

Check your payroll arrangements now

So if you don’t know who pays your salary each month, or if you suspect your arrangement could fall foul of HMRC, it’s time to change your payroll arrangements now and talk to the HMRC about making good on the backpay (they may agree a series of instalments) – before the matter is taken out of your hands.