Hi, my names Alex and I work for Danbro - Contractor Accountants as part of the marketing team
. In this article I will be discussing what and why tax codes are used, giving some examples of one's commonly issued to contractors and what they signify.
Your tax code is issued by HMRC so that the right amount of tax (PAYE) is deducted from your wage when you are paid. A tax code is usually made up of letters and numbers. The numbers are used to work out how much income should be taxed. The letter is used to determine how the income is taxed. See common tax codes below:
What do tax codes numbers mean?
You can work this out by multiplying the tax code number by 10 and adding 9. This then signifies your tax allowance
Tax Allowance = Number X 10 + 9
What do tax code letters mean?
L
Basic allowance.
P,V and Y
For those aged over 65. Higher personal allowance.
T
Requiring review by your tax inspector.
DO
All income subject to higher rate of tax.
NT
Indicates that no tax is to be deducted on your income.
BR
This means all your income is going to be subject to basic rate tax. Commonly 20%. This is usually issued to people who start a new job or who haven't got a P45 and not completed a P46 before their first payment.
K
The amount of allowances is less than total deductions.
OT
No personal allowance and all income subject to higher and basic rates of tax.
What tax codes mean for contractors?
The BR tax code is commonly used for contractors when they set up a limited company, subjecting all their income to the basic rate of tax. This rate is usually 20%. To avoid been given a BR tax code, I would advise to make sure a P45 is obtained and submitted to your new Umbrella Company, so the correct tax code is given or alternatively apply for your P46 in advance.