Your tax code tells your employer how much tax-free personal allowance to include when they calculate your tax. In this article we’ll look at what you need to know about your tax code and how it affects your pay as an umbrella company employee.
What does your tax code mean?
L Tax codes
A tax code ending in L gives your annual tax-free allowance. The most common is 1257L (2022/23) which refers to an allowance of £12,570 per year. You can calculate your weekly/monthly allowance by dividing this by 52 or 12 (52 for weeks, 12 for months).
W1 / M1 marker
A W1/M1 marker means your employer isn’t using your year-to-date figures when calculating your tax. This is most likely because they don’t have a P45 from your previous employment. A W1/M1 marker means that the weekly or monthly allowance will be used, with no reference to what might have happened in previous weeks.
S at the beginning of tax code.
If there is an S on the tax code this is a Scottish code. The personal allowance is still confirmed based on the information away from the S but if a contractor lives in Scotland, they are given a code which begins with S. This is because Scottish residents have different tax bands.
BR tax code
This can be given based on the P46 information as well as from HMRC. This is usually used when you have more than one job. BR means you do not have a tax-free allowance and therefore your full Gross payment is subject to PAYE tax.
What is a P45?
A P45 is a document that an employer gives you when you leave their employment. It shows the figures for your earnings and tax paid for the tax year so far. Your next employer needs this information to correctly set your tax code and calculate your tax.
If you supply a P45 which is dated within the current tax year, your employer will use this information. If you don’t have a P45 you can complete the New Starter Declaration (formerly known as a P46).
The New Starter asks you to select the most relevant option. The options are;
A – This is my first job since the 6th April and I have not received any of the following payments, Jobseekers Allowance, Employment and Support Allowance, Incapacity Benefit.
B – I have had another job but I don’t have a P45 and/or I’ve received the payments of; Jobseekers Allowance, Employment and Support Allowance, Incapacity Benefit.
C – I have another job and/or I am in receipt of a state, work or private pension.
The option you select will determine the tax code your employer will allocate.
A – they will use the standard tax code, with the year-to-date figures starting at zero the first time they pay you.
B – They will use a standard tax code with a W1 or M1 marker
C – They will use a BR tax code.
Why has your tax code changed?
Your employer will send information to HMRC each time they pay you, via the RTI system. If HMRC believe the information supplied is incorrect, they will send a P6 notification with the information that needs to be changed. This can be for the tax code, year to date information or for student loans.
For example, if you don’t have a P45 from your last employer and your tax code has a W1/M1 marker, HMRC might send a P6 with your correct tax code and year to date figures.
Your employer must comply with HMRC’s instructions. If your tax code has changed and you’re not sure why, or you believe it’s been done in error, we recommend you contact HMRC to discuss it.
What are the current UK tax bands?
The UK tax bands determine the amount of PAYE tax you pay, depending on how much you earn.
If you would like to confirm the weekly/monthly amounts, please divide by 52 or 12, whichever applies. These bands are based on a standard tax code of 1257L (2022/23).
Excluding Scotland –
£0.00 - £12,570
£12,571 - £50,270
£50,271 - £150,000
Scotland based on the tax code 1250L
£0.00 - £12,570
£12,571 - £14,732
£14,732 - £25,688
£25,689 - £43,662
£43,663 - £150,000
If you have questions or if we can help in any way, please call our expert team on 01296 468483 or email email@example.com