Spotting a Non-Compliant Umbrella or Disguised Remuneration Scheme

Spotting a non-compliant umbrella or disguised remuneration scheme

Most umbrella companies operate perfectly properly: they employ contractors, run PAYE correctly and pay employer taxes as required. But HMRC has repeatedly warned that a minority of umbrella companies are non-compliant, and some operate what are known as disguised remuneration schemes. For any contractor working through an umbrella, or considering it, knowing the warning signs is essential.

This article explains what HMRC says to look out for, in plain terms, and where to go for further help. It is general education, not a verdict on any particular umbrella or contract.

What is disguised remuneration?

Disguised remuneration is HMRC's term for arrangements that try to make taxable pay look like something non-taxable. Instead of paying a worker's full earnings through PAYE, a non-compliant umbrella splits the pay into two parts: a smaller amount that goes through PAYE, and a larger amount re-labelled as something else entirely.

HMRC says these arrangements may describe part of a worker's pay as a loan, grant, salary advance, capital payment, credit facility, annuity, profit share, shares, bonus, or other sum said to be non-taxable (HMRC Spotlight 60; HMRC guidance for agencies). In reality, HMRC's position is that this is still taxable income, and the worker can end up with a large, unexpected tax bill even though the scheme was marketed as boosting take-home pay.

This is not a niche problem. HMRC's own analysis of marketed tax avoidance schemes found that many are operated or facilitated by non-compliant umbrella companies, and it estimated around 70 to 80 such companies were involved in disguised remuneration avoidance during the period it studied (Use of marketed tax avoidance schemes in the UK, 2020 to 2021).

Warning signs HMRC highlights

HMRC's guidance sets out several practical red flags for contractors and agency workers to watch for (Spotlight 60; HMRC's "spot the signs" page):

• Unusually high take-home pay claims. If an umbrella promises take-home pay significantly above what similar contractors typically receive after tax, that is a signal something may be off. Genuine PAYE arrangements cannot legally deliver outsized net pay for the same gross rate.
• PAYE not operated on the full amount. A key sign, according to HMRC, is a payslip that does not show tax and National Insurance deducted from the worker's full pay. If only part of the pay appears to be taxed, the rest may be the disguised element.
• Multiple versions of payslips. Some schemes issue one payslip to the worker showing a low, fully taxed amount, and a different version (or informal statement) showing the real, higher pay figure.
• Payments via third parties or overseas entities. Money routed through loan companies, offshore trusts, or unconnected third parties, rather than paid directly and transparently, is a common feature of disguised remuneration schemes.
• Claims of HMRC approval. HMRC is explicit that it does not approve tax avoidance schemes. Any umbrella or scheme describing itself as "HMRC approved" or "HMRC compliant" should be treated with suspicion (HMRC guidance).

HMRC also advises agencies and other engaging businesses to be alert to umbrella companies offering financial incentives well above industry norms, giving different payslip versions to different parties, paying workers more than their payslip shows, using third parties in the payment chain, or being based outside the UK (Spotlight 64).

Why this matters even though the umbrella arranges it

A common misconception is that if the umbrella company runs the scheme, the risk sits with the umbrella. HMRC's position is that the liability for unpaid tax can fall on the worker, because it is the worker's income that was disguised. That is why HMRC's guidance is aimed directly at contractors and agency workers, not just at umbrellas and agencies.

This sits alongside, but is separate from, IR35 and employment status questions. Disguised remuneration is about how pay is taxed once a worker is engaged; IR35 is about whether a contract should be inside or outside the off-payroll rules in the first place. A role can be correctly assessed for IR35 purposes and still involve a non-compliant umbrella if the pay itself is mislabelled. If you're researching how status determinations work more broadly, see our other guides and browse outside-IR35 contracts or check day-rate benchmarks for context on realistic market pay.

Checking and reporting

Before joining an umbrella, contractors can compare its practices against HMRC's published checklist for agencies and businesses (check how to reduce your risk), and check HMRC's current list of named tax avoidance schemes, promoters, enablers and suppliers (named schemes list).

If you suspect an umbrella is operating a disguised remuneration scheme, HMRC says workers can report it anonymously, and HMRC states it will investigate the non-compliant umbrella company (Spotlight 60). For questions about your own tax position or a specific umbrella's arrangements, speak to a qualified contractor accountant or tax adviser, since this depends on your actual circumstances and cannot be assessed generically. For concerns about employment rights linked to umbrella arrangements, the Fair Work Agency is the relevant body to contact.

This platform does not determine, verify, or warrant IR35 status; the SDS is the client's legal responsibility. Contractors should take their own advice and consider IR35 insurance.