Understanding your tax code as an Umbrella Company contractor

If you’re new to contracting under an Umbrella Company you’ll no doubt have questions regarding your tax code, and how it compares to permanent employment or when contracting through your Limited Company.

In this blog we take a closer look at tax codes to help you understand how they work, and to prevent an unexpected end-of-year tax bill.

Your tax code

It’s your responsibility to understand your tax code and to ensure you’re on the correct one, and you can do so by using the gov.uk website. Whilst your Umbrella Company can offer advice and support with your tax code, they’re unable to amend it for you, only you can do this directly with HMRC.

BR, D0 and D1 codes

If you operate through your Limited Company then accept a contract that’s inside IR35, there’s a chance you’ll be put on a dual employment tax code (also known as a BR code). This would apply 20% tax across all of your earnings, which to be applicable would mean you’d need to be on a day rate of approximately £230, which would also imply that you wouldn’t be taking PAYE earnings from your Limited Company, and therefore dual employment wouldn’t apply. If your income from the Umbrella Company takes you into the 40% category and you remain on the BR code, it’s likely you’ll be receiving a large tax bill at the end of the year.

If you currently have a dual employment code (BR, D0 or D1) then we strongly advise you speak to HMRC to see if it’s your Limited Company showing and you’re not currently taking any PAYE income. In this case HMRC should remove the PAYE employment for the duration of your Umbrella contract. By doing so this should then put you on the correct applicable tax code, and you’ll still be able to draw dividends from your Limited Company, but also remove the PAYE employment.

1257L and 0T codes

Contractors will unlikely be on the standard 1257L tax if they’re paid approx. £500+ per day, if working the full year and not paying into the pension scheme, because their predicted earnings will exceed £100,000, and anything between £100,000 and £125,000 will mean that the personal tax free allowance will drop. Bear in mind that if your assignment doesn’t run for a full 12 months there’s a chance this will not be the case, and this is the time you should update the annualised earnings on your personal tax account.

Your tax code should be a 0T if your earnings exceed £125,000, which will mean you have no entitlement to any tax-free allowance. If at the end of the year you’ve gone through it with a tax-free allowance and your earnings are around that figure, it’s worth checking with HMRC to see if they’re able to adjust your tax code and therefore retain some of your tax-free personal allowance in the second part of the year. So be sure to keep a close eye on your online tax account to ensure your employment details are correct.

The different tax codes and their meanings

1257L – is the standard tax code for 2024/25 and allows £12,570 to be taxed at 0% for that tax year. This is done by using thresholds on a weekly / monthly basis, not once the total threshold has been reached for the year. So for the example of a contractor earning a day rate of approx. £500 working for 12 months, this tax code would be incorrect for them.

BR – All of your income is taxed at 20% without any tax-free allowance. You may be given the BR tax code if HMRC believe you to have dual employment, and that 100% of your tax-free allowance has been used elsewhere. This tax code indicates to HMRC that you have another PAYE employment which may include pension payments on your personal tax account, and therefore we advise you to double check this with HMRC. If left you’ll be classed as a Higher earner and therefore pay 40% tax, which could also earn a higher tax bill later on in the year.

D0 – All of your income will be taxed at 40% without any tax-free allowance. Again worth checking with HMRC though, as the D0 tax code suggests dual employment, and that there is PAYE income elsewhere of over £150,000.

D1 – All of your income will be taxed at 45% without any tax-free allowance. Again worth checking with HMRC though, as the D1 tax code suggests dual employment, and that there is PAYE income elsewhere of over £150,000.

0T – HMRC predicts that your earnings will exceed £125,000, and therefore removes any tax free allowance, and as such 20% and 40% taxes will commence from the first penny of your income.

K code – Is the tax code HMRC gives you when they believe you owe tax. The figure that appears after K is the amount you owe, so for example K123 would mean a figure of £1,230 is subject to extra tax.

T suffix code – Means that HMRC are reviewing your current tax code, and that it may change in the future. This can be quite common for contractors whose income can change from month to month.

X suffix – If your tax code ends with an X your tax will only be calculated on the payment that’s currently being processed, and does not take into account any tax you’ve already paid or not paid in previous periods. It will likely remove any year-to-date earnings, so if you believe this is incorrect you’ll need to contact HMRC to discuss the impact this may have on your personal tax liabilities.

C & S – C if you have a Welsh tax code, and S if you have a Scottish one.

SG Umbrella’s advice

Be sure to check your payslips to ensure your personal tax code is correct. If you’re unsure or need something explained, get in touch with HMRC. You can also check your personal tax account online for answers, and what HMRC have down for your predicted annualised earnings for each of your employments. If you don’t feel as though it’s correct speak with them directly to have any issues resolved.

Whilst the SG Umbrella team are unable to make any tax code amendments for you, we can offer advice and support surrounding tax codes. If in doubt or need some questions answered, speak to the SG Umbrella team.