Understand your tax code when working via an umbrella!

[lucyclarityumbrella]

I just wanted to write a short piece on coding notices when working via an umbrella company as I think it is something that generally can tend to be missed.

First of all understanding your tax code and making sure you are on the correct one is your responsibility. Your umbrella company should be there to offer advice, but they cannot change this for you, only HMRC can make the adjustments for you.

We are seeing plenty of contractors who have operated via their own Ltd company and then undertake an inside IR35 assignment via an umbrella company end up on a dual employment tax code (usually a BR code), this applies 20% tax across all earnings and for most of our contractors to be 20% tax payers their day rate would need to be around £230.00 per day, and this would also imply they would not be taking PAYE earnings from their Ltd company and thus no dual employment would apply.

If however your earnings via the umbrella are taking you into the 40% category and you remain on the BR code, then you are likely to be in for a shock when you end up with a tax bill at the end of the year!

If you see a dual employment code, then we would always urge you to contact HMRC and if it is your Ltd company showing and you are not taking PAYE income, then ask them to remove the PAYE employment for the course of the umbrella assignment. This should then put you on an applicable tax code. You can still continue to draw dividends from your Ltd company but remove the PAYE employment.

Crossing the tax year, we have also seen those Ltd companies which were on hold reappear as PAYE income, and dual employment tax codes be issued once again!

On another note, any contractor on around £500.00 per day plus, if working the full year and not paying into the pension scheme, is unlikely to be on a standard 1257L tax code, as their predicted earnings will be in excess of £100k, and anything between £100 and £125k then the personal tax free allowance will drop (obviously if the assignment doesn't go on for 12 months then this may not be the case and at this point you may like to update the annualised earnings on your personal tax account). Earnings over £125k and your tax code should be a 0T, giving no entitlement to any tax free allowance. If you go through the year with a tax free allowance and pip that figure, then again they may adjust your tax code to claw that back in the latter part of the year.

So my advice, please do keep an eye on your tax account online and make sure the employment details are correct, and I hope this helps!

[NotAllThere]

Thanks Lucy. I've made it a sticky.

[lucyclarityumbrella]

Superstar! Thank you might add to it bit by bit as a reference for people

[lucyclarityumbrella]

So let's explain a little bit about some of the tax codes:

1257L - this is the standard tax code for 2024/2025 and indicates that there is £12,570 for the year before taxes are due (please note this is done using thresholds on a weekly / monthly basis, not once the threshold for the year is reached). In contractor terms if your day rate is around the £500.00 mark, then if working 12 months then this code is likely to be incorrect.

BR - this means that all of your income will be charged at 20% with no tax free allowance. This may be down to HMRC viewing you as having dual employment and that all of your tax free allowance has been used elsewhere. We would always encourage people to check this tax code as it does indicate another PAYE employment (which could include pension) sat on your personal tax account. If left, and you are in fact a 40% tax payer, this could lead to a tax bill later in the year.

D0 - this means that all of your income will be taxed at 40% with no tax free allowance. Again potentially a dual employment tax code, suggesting PAYE income elsewhere of over £50k.

SD0 - this means that all of your income will be taxed at 21% with no tax free allowance.

D1 - this means that all of your income will be taxed at 45% with no tax free allowance. Again potentially a dual employment tax code, suggesting PAYE income elsewhere of over £150k.

0T - this indicates that HMRC are predicting your earnings over £125k and removing any tax free allowance, as such 20 and 40% taxes will commence from the first penny of your earnings.

K Code - this indicates that HMRC believe you owe taxes and the figure after the K indicates the amount they are looking to claw back from you for some reason (eg K123, means a figure of £1,230 on which extra taxes are due).

T Code - this indicates that HMRC are potentially reviewing your code and this may be amended at another point. Quite common for a contractor who earnings alter from month to month.

X - if you have an X at the end of the tax code, this means that your tax will only be calculated on the payment being processed; it does not take into account the tax you have already paid / or not paid in previous periods. This is likely to remove any year to date earnings, so if you think this is incorrect you must contact HMRC to discuss what impact this may have on your personal tax liabilities.

C - if you have a Welsh tax code, and S - if you have a Scottish tax code.

As for Scottish tax codes, well this is a whole other ball game, so if you need to take a look, please visit HMRC here.

In short, do look at your payslips and make sure that your personal tax code is correct, if you are not sure, pick up the phone and ask HMRC as they will have access to everything in relation to your personal taxes. Alternatively do take a look at your personal tax account online as this may help explain.

On a final note, keep an eye on your personal tax account to see what HMRC have your predicted annualised earnings down as for each employment, if you don't think this is going to be correct then maybe look to amend it, or speak with HMRC to confirm what is right for you.

HTHs