ContractorCalculator has uncovered a new umbrella company scheme that could leave contractors with huge tax bills. The scheme became known when ContractorCalculator was investigating an unusual payslip and contract from a public sector contractor who worked via an umbrella company.

The scheme involved issuing gross payments in advance to their contractors. These payments were taxable at a later date. The payments were disguised as bonuses, and the contractor was unaware that tax was due.

The contractor received payment in two parts. The first part is recorded as a salary and is subject to national insurance and PAYE income tax. The second, which was the larger of the two payments, was given as a “taxable discretionary bonus.”

This second payment is actually an advance and so was not taxed at source by the umbrella company. However, neither the agency nor the umbrella company told the contractor that the payment would be subject to tax at a later date.

ContractorCalculator CEO Dave Chaplin said: “What the agency and umbrella have told the contractor is that working in this way will be more tax efficient than running a limited company outside of IR35.

“This particular umbrella company operates by asking the contractor to state their desired take home pay, say 79% of their gross income – with the umbrella company engineering the payslip to allocate a lump sum as a ‘bonus.’

“This gives the impression that the contractor has achieved their desired income, but it fails to point out that the bonus will be subject to tax. What’s worse is the umbrella company was recommended to the contractor by their agency.”