Understanding your tax code

Your tax code is based on the amount of tax you should be paying and the amount you can earn before tax applies.

Whatever your employment status, it’s important to know what code you’re on. Whether you’re an umbrella company employee, are self-employed, or if you’re a limited company contractor, you will have a specific tax code. You’ll find yours on your payslip or on your P45.

How do Tax Codes work?

HMRC uses tax codes to determine the amount of tax you need to pay each time you get paid through PAYE (Pay As You Earn). Through PAYE, your annual tax bill gets spread out over 12 months, rather than in one lump sum. The tax code is the identifier that tells your employer how much tax should be deducted from your salary each time you get paid.

If you have multiple employers or pension providers, you may get more than one tax code.

If you’re on the wrong one, you could be paying HMRC more than you ought to be. On the other hand, you risk getting penalised if you’re paying too little.

Every year, you should receive a P60 form that includes your most up-to-date tax code. Furthermore, when you leave a company, you’ll get a P45 that will also show your code.

Umbrella Company Contractors

As an umbrella company contractor, you’re an employee of your umbrella company. And, as an employee, your tax code tends to be fixed. Your umbrella company will likely run your PAYE scheme, deducting the appropriate amount from your weekly / monthly salary.

However, if you switch between providers, you may get placed onto an emergency tax code on a temporary basis.

Limited Company Contractors

Limited company contractors, meanwhile, are employed by their own business. So, their contractor accountant (if outsourced), or in-house payroll team, should run a PAYE scheme on their behalf.

If you are a limited company contractor and you outsource your payroll to a contractor accountant, like Danbro, your tax code will be displayed on your weekly / monthly payslip. It’s your accountant’s responsibility to ensure you’re operating on the appropriate tax code.

What does my Tax Code mean?

For more information on the most common tax codes and what they mean, check out our exclusive video/



The numbers inform employers and pension providers about how much tax-free income you’re entitled to during that tax year.

The letters in your code are determined by your individual circumstances, impacting your Personal Allowance.

For a comprehensive list of what each tax code means and how it may apply to you, click here.

Emergency and Updated Tax Codes

As stated, if you change jobs, employment status, or if you start getting certain company benefits, you’re likely to be put on a temporary, emergency tax code. Such as:

• 1250 W1
• 1250 M1
• 1250 X

This means you’ll pay tax on any income you receive above the basic Personal Allowance.

Once you’ve given your new employer details about your previous income / pension, HMRC will correct your code automatically. Your employer should be able to get the information they need from your P45.

Moreover, HMRC will also update your tax code if your income changes or if you start receiving extra income from another job.

Why do Tax Codes change?

HMRC change and update people’s tax codes to ensure they are paying the correct amount of tax. They will contact you if your tax code is subject to change.

If you’re switching from being a limited company contractor to operating through an umbrella company, you’re likely to get a new tax code.

Once your tax code’s been updated, HMRC will inform your current employer and pension provider. Your next payslip will display any pay alterations if you were previously paying too much / too little tax.

If you have any concerns about your tax code or you think your code might be incorrect, take a look at HMRC’s free online service.

Your Tax Specialists

If you think your code needs updating, contact HMRC directly. Or, if you’re a contractor or temporary worker and want to know more about how your tax code can affect your earnings, get in touch, here.