It can be quite confusing when you receive your letter from the HMRC that explains what your tax code is. When you start a new job and check your payslip to see if your tax code has changed and, you aren’t sure if it is correct or not, it can become quite overwhelming. Don’t worry though, we are to help you make sense of your tax code.

Your tax code is used by your employer or pension provider to work out how much income tax to take from your pay or pension. HMRC will tell them which code to use. If you are self-employed, you pay tax on your income through self assessment rather than PAYE. A tax reference that all self employed people have is a unique taxpayer reference (UTR). This is a 10 digit code that you receive when registering as self employed.

Paying tax if you are employed

Tax codes are used by the HMRC to tell employers how much tax they need to deduct from an employers pay via the PAYE system. Tax codes are made up of a number followed by a letter such as 1257L. A tax code is not unique and many people can be on the same one.

Tax codes are then broken down by numbers and letters. For example, the tax code above shows how much money you can earn tax free. 1275 means you can earn £12,570 in the tax year before you have to pay tax. The letter then refers to your situation and how it affects your tax-free personal allowance. L means that you are entitled to standard tax-free personal allowance.

If your tax code changes, HMRC will more than likely contact you to let you know about this change and the reason for it.

What do the letters in HMRC tax codes mean?

  • L – You are entitled to the standard tax-free personal allowance
  • M – Marriage allowance – you have received a transfer of 10% of your partner’s personal allowance
  • N – Marriage allowance – you have transferred 10% of your personal allowance to your partner
  • T- your tax code includes other calculations to work out your personal allowance
  • 0T – your personal allowance has been used up or, you have started a new job and your employer does not have the details they need to give you a tax code
  • BR – all of your income from this job is pension or taxed at the basic rate (usually used if you have more than one job or pension)
  • D0 – all your income from this job or pension is taxed at the higher rate (usually used if you have more than one job or pension)
  • D1 – all your income from this job or pension is taxed at the additional rate (usually used if you have more than one job or pension)
  • NT- you are not paying any tax on this income l S – your income or pension is taxed using the rates in Scotland
  • S0T your personal allowance Scotland has been used up or, you have started a new job and your employer does not have the details they need to give you a tax code
  • SBR – all your income from this job or pension is taxed at the basic rate in Scotland (usually used if you have more than one job or pension)
  • SD0 – all your income from this job or pension is taxed at the intermediate rate in Scotland (usually used if you have more than one job or pension)
  • SD1 – all your income from this job or pension is taxed at the higher rate in Scotland (usually used if you have more than one job or pension)
  • SD2 – all your income from this job or pension is taxed at the top rate in Scotland (usually used if you have more than one job or pension) l C – your income or pension is taxed using the rates in Wales
  • C0T – your personal allowance Wales has been used up or, you have started a new job and your employer does not have the details they need to give you a tax code
  • CBR – all your income from this job or pension is taxed at the basic rate in Wales (usually used if you have more than one job or pension)
  • CD0 – all your income from this job or pension is taxed at the intermediate rate in Wales (usually used if you have more than one job or pension)
  • CD1 – all your income from this job or pension is taxed at the higher rate in Wales (usually used if you have more than one job or pension)

Personal allowance

The standard personal allowance for employees is £12,750 a year. This is the amount of money that you can earn that you do not have to pay tax on. Your personal allowance may be higher if you claim marriage allowance or, blind person’s allowance, it is smaller if you income is over £100,000.

Band breakdown:

  •  Personal allowance has a taxable income of up to £12,570. The tax rate is 0%
  • Basic rate band has a taxable income of £12,571 to £50,270. The tax rate is 20%
  • Higher rate band has a taxable income of £50,271 to £150,000. The tax rate is 40%
  • Additional rate has a taxable income of over £150,000. The tax rate is 45%
    * Income tax bands are different if you live in Scotland.

Paying tax if you are self-employed

When you are self employed, you are responsible for telling HMRC that you are self employed, filling a self assessment tax return each year and paying your tax bill and National Insurance contributions. If you stop being self employed, you need to tell HRMC, otherwise you will still be expected to file a tax return and could be fined if you don’t do so.

A UTR number is used instead of a tax code if you are self employed. To get this, simply register as self employed on the HMRC website and follow the steps from there.

How to register as self-employed

The HMRC have an online portal where you can register as self-employed. Some of the information you will need to provide is:

  •  The date you started your business
  •  Basic personal details including your National Insurance number and home address
  •  Information about your job.

When you receive your UTR number, HMRC will also set up your online account which gives you access to a range of digital government services.

Naming your business

When registering as self employed, you also need to decide on a name for your business. Lots of people name their trade under their own name for example. If you choose a specific trading name, make sure to check that there are not any existing businesses using the same name. This helps to avoid copyright infringement and any potential confusion.

If you are starting out as self employed and would like assistance with your accounts, feel free to get in touch with the Cooper Accounting team, we would love to help.