Crystal Umbrella

This is the HMRC compliant standard used by 85% of all individuals in employment in the UK. The PAYE system is a method of paying income tax, which involves your employer deducting tax from your wages or occupational pension, before paying them to you. Wages include sick pay and maternity pay.

PAYE has the benefit of simplicity, because you pay tax over the whole year, every time you are paid. Your employer is responsible for sending the tax and NIC contributions directly to HM Revenue & Customs (HMRC), so you don’t have to do anything. However as a contractor this may not be the most tax efficient solution.

This is the methodology used by all PAYE based Umbrella Companies, including Crystal Umbrella. It avoids the entire headache of IR35 legislation as it is based on the HMRC compliant standard for 85% of all individuals in employment in the UK.

PAYE has the benefit of simplicity, because you pay tax over the whole year, every time you are paid. Your employer is responsible for sending the tax and NIC contributions directly to HM Revenue & Customs (HMRC), so you don’t have to do anything.

When you start to work through an Umbrella Company your Agency/Client is no longer responsible for sending the Tax and NI contributions to HMRC; instead, the task is performed by your PAYE Umbrella.

As a contractor, you can choose to work where you please and for any period of time your Umbrella has no contractual tie to you. However, your standard PAYE rate of pay will usually be uplifted to conver the increased cost for Employers NI Contributions. Often referred to as your “Limited Rate” this is the amount your Umbrella Company receives for each hour you work whilst under contract.

In addition to the enhanced rate you receive as a contractor, Umbrella Companies, such as Crystal Umbrella, enable you to claim back any business expenses you incur, whilst on contract, which results in higher take home pay for you.

For more details on either Crystal Umbrella’s service offering or expense policy, simply click the relevant links.

PSC’s are commonly one-man bands, processing income as part salary and part dividend payment. In the past contractors used this method to exploit loopholes in the legislation and thereby improve tax efficiency. Contractors would typically set up a limited company and pay themselves a minimum wage, which was supplemented by dividends.

Here are some of the drawbacks of this system, which is now classed as risky for the following reasons:

• For the contracts inside the IR35 legislation, dividend payments are taxed as PAYE under the deemed employment legislation.
• HMRC view the minimum wage/dividend option as tax avoidance and may impose PAYE, when they undertake a compliance visit.
• If there is no "goodwill" in the company and/or limited share capital, the contractor may be seen as receiving a "disproportionate return on initial investment" and the dividend will be taxable as PAYE (according to section 447 of the ITEPA, 2003).
• Outside the IR35 legislation, if a dividend payment takes a contractor over the 40% tax threshold they will face an end of year personal tax liability, which is often not expected or accounted for.

You will find many agencies and clients will not allow you to use this method until you have had your employment contract reviewed by an IR35 specialist, something that can cost upwards of £150 per contract assessed.

Offshore schemes include any financial set-up in which income is moved outside the UK to avoid paying the host country’s Tax and National Insurance. Payments are usually made as distributions, loans and dividends.

HMRC’s Special Compliance Office is gearing up for a crackdown on offshore umbrella companies and other tax avoidance schemes designed for solo contractors caught by the IR35 legislation.

HMRC have warned contractors not to rely on schemes intended to ‘get around’ IR35, as it is possible they are unlikely to withstand such detailed scrutiny.

• All income generated in the UK by a UK resident must be declared, whether received or not and is subject to IR35 criteria and UK taxation.
• HM Revenue & Customs now have the power to view details of around 100,000 UK-domiciled clients of Offshore Schemes

Our advice on offshore accounts is simple; if you have UK residency don’t do it! Never get involved in any kind of offshore business; it’s just not worth the risk.

Once seen as an attractive option, the 2002 Pre-Budget Report announced immediate legislation to counter the avoidance of Tax and National Insurance contributions (NICs) through the abuse of EBTs.

Under this scheme

• The contractor works for a company and receives a basic salary, usually 20-30% of the actual contract value, with the balance being paid into an offshore trust. The trust then loans the money back to the contractor.
• Because the loan is in a foreign currency it avoids IR35, taxation and NI.

HMRC have now closed the loophole that allowed EBTs to operate. Under current legislation, tax relief is now only allowed on PAYE payments made by the trusts, this will be on the lower salary figure and not on the loan.

The HMRC Anti-Avoidance Group has set up a team to project-manage these cases to ensure that the tax outstanding is collected systematically and consistently.