Put simply your tax code is used to determine how much tax free income (Personal Allowance) you will earn per tax year and the income tax you will pay once you have exceeded that threshold.
The standard Personal Allowance for an employee who works one job is £12,570 but there are several factors which can determine your tax code and Personal Allowance.
What does your tax code mean?
Most tax codes consist of a number followed by a letter, for example 1257L. The numbers tell your employer or payroll provider the amount of tax free income you should receive each tax year. However the last digit of the tax free income is removed, so in the case of the example above the Personal Allowance would be £12,570. The letter in your tax code reflects your situation and any implications this has on your Personal Allowance, for example L means you are entitled to the standard tax-free Personal Allowance, M means you’ve received a transfer of 10% of your partner’s Personal Allowance, etc. For more information on what each letter means click here.
How can you check your tax code?
It’s important to keep an eye on your tax code to ensure it accurately reflects your circumstance. Checking your tax code is simple, it can be found on any of your payslips, a P60 and even a P45 document. Alternatively you can check your tax code on HMRC’s online portal.
What should you do if you think your tax code is wrong?
If for any reason you think that your tax code is wrong, you need to contact HMRC so that they can notify your employer. You can contact them online or by phone on 0300 200 3300 but whichever method you use to contact them, you will need your National Insurance (NI) number to hand.
What affects your tax code?
Various allowances and benefits such as pension contributions, charitable gifts and interest payments on loans can affect your tax code so it’s important that HMRC are aware if you are utilising any allowances.
Working more than one job will not change the way you are taxed, you’re still entitled to the same Personal Allowance. But, depending on your overall income you may find yourself in a higher tax bracket.
Does working through an umbrella company affect your tax code?
As an umbrella company contractor you are an employee of the umbrella company. This means that your umbrella company would deduct all of the necessary PAYE and NI contributions before paying you, your take home pay. Therefore using an umbrella company won’t affect your tax code.
Nevertheless, HMRC can change or update tax codes to ensure people are paying the correct amount of tax when it is deemed necessary but they will always contact you to notify you of the change.
