The promise of higher take-home pay can be tempting, especially in a tax system that already feels complex and burdensome.

However, for contractors, falling into a tax avoidance scheme – whether knowingly or not – can have serious consequences.

Already in 2025, HMRC has identified five new tax avoidance schemes.

It is, therefore, worth reinforcing the message that these schemes are still widespread, particularly in the umbrella company sector.

If you contract through an umbrella company, it is essential to understand the risks of tax avoidance schemes, how to spot them, and why staying compliant is always the best option.

How do tax avoidance schemes work?

Tax avoidance schemes artificially structure income to reduce or eliminate tax liability. These schemes are often marketed as “HMRC-compliant” or “fully legal,” but this is rarely the case.

A common method used is disguised remuneration, where a portion of a contractor’s income is paid through loans, advances, or other non-taxable methods rather than salary. For example:

• A contractor is told they will receive a small salary taxed under PAYE, but the rest of their income will be paid as “bonuses,” “loans,” or “credits”, supposedly exempt from tax.
• The umbrella company deducts minimal tax but promises higher take-home pay, claiming their structure is approved by HMRC.
• In reality, all earnings should be taxed as salary, and when HMRC investigates, the contractor is held responsible for unpaid taxes.

Why you should avoid these schemes

Whilst it may seem fairly obvious why these schemes should be avoided, here are a few takeaways to consider:

• You, not the scheme operator, are liable for unpaid tax – HMRC takes the position that contractors are responsible for their own tax affairs. If you unknowingly enter a tax avoidance scheme, you cannot pass the blame to the umbrella company or agency that introduced you to it. You could face:
• A large tax bill covering unpaid Income Tax and National Insurance Contributions (NICs).
• Interest and penalties on the amount owed.
• Potential legal action if HMRC believes there was deliberate tax evasion.
• Tax schemes rarely withstand HMRC scrutiny – HMRC is constantly identifying and shutting down tax avoidance schemes, adding new non-compliant providers to its official watchlist. Even if a scheme seems legitimate today, there is a strong chance that HMRC will investigate it in the future, leaving you exposed.
• Reputational damage and career impact – If you are caught up in a tax avoidance scheme, it could affect future contracts. Some businesses are already conducting supply chain due diligence to ensure contractors comply with tax rules. Being linked to a tax scheme could make you less attractive to future clients.

How to protect yourself

If you operate through an umbrella company, be cautious of any scheme offering unusually high take-home pay. A legitimate umbrella company will:

• Pay your entire salary through PAYE, with normal tax deductions.
• Provide a transparent payslip showing tax and NIC deductions.
• Not offer payments via loans, credits, or other tax-free arrangements.

Staying compliant is always the best approach

While tax avoidance schemes may promise quick financial benefits, the long-term risks far outweigh any short-term gains.