Your Umbrella Tax Code Explained

Working via an umbrella company can mean that, unlike being in permanent employment, HMRC may see fluctuations in your taxable salary each pay period. This can make it difficult for them to forecast your annualised earnings, and as such it can result in changes to your tax code.

To give you a scenario; if, as a contractor, you end up being paid for 3 weekly timesheets, when you are on a weekly pay cycle, then the knock on effect is that HMRC could predict your earnings at 3 times the amount you are actually likely to earn. This could sometimes result in a coding notice which would look to accommodate the higher salary (incorrectly).

So how do you rectify this?

As this is linked to your personal taxes, it is not possible for the umbrella to make any amends their end. Therefore, you have a couple of options… either contact HMRC and request an amend, or log into your personal tax account online and update your annualised earnings to reflect your actual anticipated figures.

So you’ve received a coding notice, but what do the letters in your tax code mean?

The letters at the end of your tax code indicate your tax circumstances for that particular employment and determine how much tax you pay. If you have more than one job, you will have a tax code for each one.

L – you’re entitled to a basic tax-free personal allowance.

BR – stands for Basic Rate. This means that your entire income is subject to 20% tax and you have no personal allowance, and does not take into account higher rate tax brackets. This usually happens when you have dual employment or you additional income from a pension.

D0 – as above but your entire income is taxed at 40% (higher rate) tax.

D1 – all your income is taxed at the additional rate of 45%. This is usually where you have income over £150,000.

K – if your tax code is pre-fixed with a K it usually means that HMRC are recovering tax you owe.

OT – this means that your total personal allowance for the year has already been used up. This code is useful if you know that your earnings are likely to be in excess of £125k for the year.

M – stands for “marriage allowance” and means that 10% of your partner’s personal allowance has been transferred to you.

N – the reverse of above – you’ve transferred 10% of your personal allowance to your partner.

S – your income is taxed at the Scottish rate of income tax.

NT – you are not paying any tax on this income.

Understanding the numerics on your tax code…

The standard tax code for 2021/22 is a 1257L – this gives you a personal tax free allowance of £12,750 for the year.

If you receive a coding notice with, for example an 811L, this in turn means your tax free allowance is now £8,110 for the year. The same principle applies to K codes, where HMRC are looking to claw back unpaid taxes from you. So on a K282 code, this indicates that HMRC are looking to claw back £2,820 of unpaid taxes from you.

What does the X or W1/M1 mean after my tax code?

Cumulative tax codes (e.g. 1257L)

Most people are on a cumulative tax code. You can identify a cumulative code because it does not include ‘W1’ or ‘M1’. This simply means your tax is calculated on your overall year-to-date earnings. The tax due on each payment is determined after taking into account any tax you’ve already paid this year and how much of your accumulated tax-free personal allowance has been used. In other words, it looks at your previous earnings.

This has the advantage of meaning any unused allowance rolls over to future weeks.

Non-cumulative tax codes (X or W1/M1)

If you see an X or W1/M1 attached to your tax code, it means your tax is calculated only on your earnings in that individual pay period.

The tax due on each payment is determined without taking into account any tax you’ve already paid this year or how much of your personal allowance has been used. In other words, it only looks at this single payment for the period.

This has the disadvantage of meaning any unused allowance will not roll over to future pay periods, which could result in your paying too much tax.