The tax authority says some arrangements leave individuals at risk because they are ultimately responsible for their tax affairs and for paying the correct amount of tax and national insurance contributions (NIC).

HMRC is warning people to be careful of arrangements where the companies that use them claim they will help them keep more of their income and reduce their paperwork.

As an example, it cites situations where individuals receive a small payment which has tax and NIC deducted, followed by a larger payment without tax and NIC deducted.

The larger payment may arrive from a different account than the first payment, potentially from overseas, although not necessarily, and is likely to be referred to as something other than pay, such as a loan or credit.

HMRC advises people to make additional checks if the company promises that they can keep 80%, 90% or 95% of their wages and be tax compliant, or if only a fraction of their salary is paid through payroll and subject to PAYE.

It says that payments made using a loan, credit or investment payment which the company claims are not subject to income tax or NIC are tax avoidance.  It also warns people to be careful if the payment from the umbrella company is routed through various companies before it comes to them.

The guidance states such arrangements are extremely high risk and likely to be challenged, with the possibility of an individual being asked to pay additional tax, NIC and interest. There may also be penalties.

Anyone who is involved in this type of arrangement, or has used one in the past, is advised to withdraw from it and settle their tax affairs with HMRC.

Guidance on umbrella companies offering to increase your take home pay (Spotlight 45) is here

Report by Pat Sweet