Disguised remuneration schemes have been used as a scheme for tax avoidance. They were made retroactively illegal in 2011 when the government shut the legal loophole after Section 7a of the Income Tax (Earnings and Pensions) Act 2003 passed into law. Anyone using or having used these schemes is now seen as acting or having acted illegally.
Disguised remuneration – how it works
The Low Incomes Tax Reform Group (LITRG) explained that disguised remuneration is where a person is ‘paid a minimum wage element and a non-taxable element’ by an umbrella company such as:
- an advance
- a grant
- a loan.
At present this is not legal. As LITRG observes, disguised remuneration is ‘not compliant with tax law’. However, it WAS legal in the past, as there was no law against it.
The United Kingdom Government refers to these schemes by their full title as ‘disguised remuneration tax avoidance schemes’. It said these schemes ‘aim to avoid paying Income Tax and National Insurance contributions’. Employers would either pay employees a minimum wage and top it up with a reimbursement they called a loan, grant, or advance, or pay only the disguised remuneration. This way little or no tax or National Insurance (NI) needed to be paid.
Second, the authorities pointed out that people using disguised remuneration schemes ‘claim these payments are not subject to tax rules and often fail to offer any explanation’. They stated that all the money paid to you in return for your services should be subject to both income tax and National Insurance contributions.
Sometimes staff affected may not have had any choice when the employer set up the disguised remuneration scheme. As LITRG goes on to explain, the employee may have not been offered an alternative, or felt that they had no alternative but to enter the scheme, and they may not have been aware of the possible legal and tax implications for entering into this scheme when they did, or in the future. An employer using an umbrella company may also not have been aware that disguised remuneration was in fact tax avoidance and could be classed illegal through future legislation.
Umbrella companies
Umbrella companies are often used by recruitment agencies for those doing temporary jobs. An employee being paid via an umbrella company may not have had sight of how the remuneration was broken down, and in that case they would have had trouble seeing that a disguised remuneration was being used.
LITRG highlighted that ‘umbrella companies are not regulated’ and observed that there is a ‘wide spectrum of operators in the marketplace’. They stated that the majority of umbrella companies do comply and do not get involved in disguised remuneration schemes.
But LITRG then claimed that some umbrella companies do get involved in such schemes and that ‘some [of these businesses] have been specifically set up for this purpose.’ The advantage umbrella companies see in using disguised remuneration is that it can lower costs and save paying tax for both the umbrella company and their customers.
LITRG observed that there is evidence suggesting umbrella companies may attempt to ‘sell’ disguised remuneration schemes to employees as a method of raising their take-home pay. They point out that such companies ‘may simply frame things in terms of you receiving an unrealistic amount of take-home pay, for example 80%, 85%, etc.’ Other examples of such behaviour include using disguised remuneration to pay their workers ‘without making it clear that they are doing this.’ In this latter example, LITRG highlights that the employee is not guaranteed to benefit at all, or may only benefit by a small and probably unnoticeable amount.
When and why did the government make them illegal?
Disguised remuneration became illegal in 2011 after the Budget when the government introduced legislation as part of the Finance Act 2011. Prior to 2011, disguised remuneration schemes generally involved the employer paying a contribution to a third-party, often an Employee Benefit Trust (EBT) – schemes which HMRC regarded as never having worked. The government’s policy objective was to tackle tax avoidance and make sure those who have used disguised remuneration tax avoidance schemes ‘pay their fair share of tax and National Insurance contributions’.
Review into disguised remuneration schemes
On 6 March 2025, Bury North MP James Frith asked the Leader of the House of Commons Lucy Powell MP about ‘disguised remuneration’ schemes. He said that ‘while everyone should pay their fair share of tax, many people in the past used these schemes in good faith when they were legal’. Further he observed that affected people ‘now face retrospective penalties’. Mr Frith acknowledged that ‘the Government’s long-awaited review is a welcome step’, but that many people who have been affected feel that its scope is too limited. He said they believe that the review fails to examine:
- how we got here,
- how the scheme was implemented,
- those who promoted and mis-sold these schemes.
The MP asked the Leader of the House of Commons to ‘allocate time for a full debate on the loan charge and its consequences’. In response, Lucy Powell said she, and the government, recognised James Frith’s ‘concerns about the loan charge scheme’. Ms Powell advised that the administration is ‘committed to ensuring that there is a fair resolution for those affected’. What did the Government mean by that? Ms Powell seemed to be referring to the new independent review of the Loan Charge which was announced by the UK administration at the Budget in Autumn 2024. The independent review started on 23 January 2025.
Signs of disguised remuneration in your pay packet
LITRG advise people to be on the lookout for potential signs of disguised remuneration, including but not limited to:
- receiving more than one payment into your bank account each pay period
- not receiving a payslip or receiving a payslip that shows a different ‘net’ amount to what you actually received
- information in your personal HMRC account (or on the HMRC App) about your pay and taxes that does not match what you are being paid
- confusing or unclear paperwork on contracts or payslips, or alternatively none at all
- an agreement where you get payments that you are told are not taxable
- a contract of employment showing that you’ll only be paid the national minimum wage, when you know you will be paid more than that
- arrangements that offer to let you keep more of your pay than you normally would
Be aware and know what to look for
LITRG advised people to ‘make sure your umbrella company is not using a [disguised remuneration] scheme to make payments to you.’ They also urge people in this situation to be ‘extra vigilant if your existing umbrella company changes hands or gets taken over’. This warning stems from an example where a compliant umbrella company was taken over by one running a disguised remuneration scheme behind the scenes, into which colleagues were entered into without their knowledge. Evidence of this may include the employer’s name or PAYE reference number being changed on your payslip. So, make sure you are vigilant so you don’t ‘fall foul’ of the rules on disguised remuneration.
