Understanding Your Tax Code as a Contractor or Freelancer

A quick guide from SBX Accountants

If you're self-employed or juggling different income streams, tax can feel like a moving target. Between changing HMRC rules, multiple income types, and digital compliance requirements, it’s easy to overlook one key detail: your tax code.

At SBX Accountants, we simplify the jargon so you stay informed, compliant, and in control of your finances.

What Is a Tax Code?

A tax code is issued by HMRC and tells your employer, pension provider, or other income source how much Income Tax to deduct. Even if you're self-employed, understanding your tax code is still important - especially if you also have:

• A part-time job
• Dividend income
• Rental income
• A pension

Your tax code determines how much of your income is tax-free and flags any adjustments HMRC makes based on previous underpayments, benefits, or other factors.

If it’s wrong, you could end up paying too much or too little tax -  leading to surprise bills or missed refunds.

Why It Matters for Contractors and Freelancers

Many contractors and freelancers have more than one source of income. For example, you might:

• Be employed part-time and freelance on the side
• Have property income alongside your contracting work
• Take a director’s salary from your limited company

In any of these cases, HMRC may apply different tax codes to each income stream. An incorrect code could:

• Tax all of your income with no allowance
• Miss additional income entirely, triggering penalties later
• Lead to under- or over-payments that take months to correct

Our team at SBX Accountants regularly reviews clients’ tax codes to help avoid these common issues before they cause problems.

Common UK Tax Codes (2025/26)

Here’s what some of the most used tax codes mean:

• 1257L – The standard tax code. You get the full £12,570 personal allowance.
• BR – Basic Rate. 20% tax on all income. No personal allowance applied. Often used on second jobs.
• D0 – 40% tax rate. Used if you're earning above the higher-rate threshold from that income source.
• D1 – 45% tax rate. For income above £125,140.
• K* – Used when you owe tax on untaxed income, such as benefits or previous underpayments.
• 0T – No allowance applied. Often temporary or used when HMRC hasn’t yet received your full income details.
• NT – No tax deducted. Only used in specific exempt situations.

Suffixes and prefixes:

• L – You’re entitled to the full personal allowance.
• M / N – Used when Marriage Allowance is transferred between spouses.
• T – HMRC is reviewing your tax situation and applying a tailored code.

Regional Tax Codes

• S prefix – You’re taxed under Scottish income tax rates.
• C prefix – You’re taxed under Welsh income tax rates.
  These can be combined with other codes (e.g. SBR, CD0) to reflect both location and rate type.

Think Your Tax Code Might Be Wrong?

You’re not alone—tax code errors happen more often than you’d expect. Here’s what to do:

• Log into your Personal Tax Account via GOV.UK to view your code.
• Check your payslips and P60/P45 for inconsistencies.
• Contact HMRC or let SBX Accountants help review and correct it as part of your service package.

How SBX Accountants Can Help

We work with freelancers, contractors, and small business owners every day, helping make sense of tax—not just codes, but your entire financial setup.

Here’s what’s included in our tailored support:

• A dedicated accountant who knows your business
• Year-round advice and support
• Tax planning and quarterly reviews
• Self-assessment and corporation tax filing
• IR35 and payroll support
• VAT registration, filing, and compliance
• Full Making Tax Digital (MTD) compliance
• Integration with QuickBooks (our primary cloud tool), plus support for Xero, FreeAgent, and Sage if needed

Cloud Accounting that Works with You

With your SBX plan, you’ll get access to QuickBooks, allowing you to:

• Track income, expenses, and mileage
• Send invoices and manage payments
• Keep an eye on tax liabilities
• Share data with your accountant in real time
• Stay compliant with MTD rules

Your accountant has full visibility - so we can support you proactively, not just reactively.

Get Started Today

Understanding your tax code is just one part of staying financially fit as a contractor or freelancer. At SBX Accountants, we give you the tools, support, and peace of mind to stay focused on your work - not your paperwork.

 ✅ Fixed monthly pricing
✅ Expert advice, unlimited support
✅ Cloud accounting included

📞 Contact SBX Accountants today or visit our website to learn more.

Let’s take the hassle out of tax - so you can focus on what you do best.