How to avoid emergency tax codes while contracting
Hi, my names Alex and I work for Danbro Contractor Accountants
, as part of the marketing team. In this article I will be addressing the issue of emergency tax codes that may affect contractors when they move from contract to contract and what measures they can take to avoid this.
Emergency tax codes take effect when contractors don't have a P45 to give their new employer. The emergency tax rate is usually much higher than the standard tax rate therefore the contractor ends up being taxed much more of their earnings. An emergency tax code is the same for everyone and is based on the tax-free earnings allowance. As most people are paid monthly or weekly, a contractor's tax-free allowance is spread over the year. Emergency tax codes were introduced by HMRC to help improve their cash flow.
A P45 form will show the earning and income tax that has been accumulated so far for that contractor, and will also show the previous tax code so the new Umbrella Company can use it. A P45 is issued automatically when you leave your previous employer with a copy also being sent to HMRC.
When a contractor starts work for an umbrella company they usually get placed under an emergency tax code. As part of our application process Danbro sends out a blank P46 to be completed by the contractor and then we send this to HMRC. The P46 allows HMRC to generate a new tax code for the employee, and any unnecessary tax that has occurred due to the initial emergency tax is reimbursed to the contractor in a lump sum.
To avoid an emergency tax code, contractors who have a gap in their employment or are between contracts are able to apply to HMRC for a tax code in advance. The advantages of this are; when the time comes to start their new contract, they will hopefully have the correct tax code back from HMRC to give to their umbrella company to avoid getting emergency taxed. Umbrella Company Calculator
How to avoid emergency tax codes while contracting