What Is Your Tax Code On A Zero-Hour Contract?

If you are wondering what your tax code is if you are on a zero-hour contract, you will find the answer to your question in the following article where we will discuss how a zero-hour contract will determine your tax code. In addition to this, we will also explore factors that can influence your tax code under a zero-hour contract; as well as summarise some of the pros and cons of a zero-hour contract, considering the impact on your tax code and subsequent tax liability.

What Is Your Tax Code On A Zero-Hour Contract?

If you are an employee on a zero-hour contract, you can easily find your tax code mentioned on your payslip. As a zero-hour employee, it is part of your basic employee rights to (a) receive a payslip and (b) have your income tax deducted under the PAYE system.

If you are on a zero-hour contract but you don’t receive a payslip or are unable to identify your tax code on it, you may need to ask your employer to confirm your tax code, refer to your Personal Tax Account using your Government Gateway user ID and password or simply check with the HMRC.

As an employee on a zero-hour contract, you must know that there is no fixed tax code for individuals who are working on a zero-hour contract. However, there are some tax codes that some zero-hour contract employees will find common among themselves. These include the following:

• 1257L: This is the most common tax code for individuals with one job and a standard personal allowance. It means you can earn £12,570 in a tax year before you start paying income tax.
• BR: This tax code stands for “basic rate” and is used when all of your income is taxed at the basic rate of 20%. It may be applied if you have multiple sources of income or if your earnings exceed the basic rate threshold.
• 0T: The 0T tax code is used when there are no allowances or deductions applied to your income. This can occur if HMRC doesn’t have enough information about your circumstances or if you have used up all your allowances.
• D0 or D1: These tax codes are used for individuals with higher incomes who pay tax at a higher rate (40% or 45%) on all their income, respectively. This might apply if you have significant additional income from other sources.

If you are still unsure, you can use an online tax calculator to calculate your tax liability.

However, your tax code as a zero-hour contract employee will be based on your individual income and circumstance that will determine your personal allowance and the amount of applicable tax.

What Are The Factors Affecting Your Tax Code If You Are On A Zero-Hour Contract?

Many factors can affect your tax code if you are on a zero-hour contract. Here is a summary of the key factors and a description of the potential impact they can  have on your tax code under a zero-hour contract:

• If you have additional sources of income on top of your earnings from a zero-hour contract, such as self-employment, rental income, or dividends from investments, these earnings will be considered taxable income and can impact your tax code; especially if your personal allowance is assigned to them.
• If you have used up your personal allowance through other employment or income sources, it can affect your tax code on your zero-hour contract earnings. This means that you may not have any tax-free personal allowance remaining and all your earnings from a zero-hour contract will be considered for your tax code calculation and subsequent tax deduction.
• If you have underpaid or overpaid taxes in a previous tax year, HMRC may make adjustments to your tax code to recover the underpaid tax or refund any overpaid tax. These adjustments can influence your tax code for the current tax year and make financial planning a challenge especially if you are on a zero-hour contract with an unconfirmed amount of income.
• Certain benefits and allowances, such as company-provided benefits, tax credits, or state pensions, can impact your tax code if you are under a zero-hour contract. These benefits and allowances are taken into account when calculating your overall tax liability and can reduce your personal allowance or increase the amount of tax that is due on your earnings.

What Are The Benefits Of Being On A Zero-Hour Contract?

As in the case of any situation, there are pros and cons of having a zero-hour contract. The pros include:

• flexibility in working hours
• opportunity for additional employment
• multiple employer opportunities

With a zero-hour contract, you have the freedom to choose your working hours based on your preferences. This flexibility enables you to decline work that doesn’t align with your preferences or availability. It also allows you to increase your working hours when you anticipate a tax code adjustment and reduced income to take home after tax deduction.

At the same time, if your income goals are not met solely through a zero-hour contract, you have the option to seek additional work with other employers. Zero-hour contracts typically do not include exclusivity clauses, allowing you to pursue multiple employment opportunities concurrently.

Additionally, a zero-hour contract grants you the ability to work for multiple employers simultaneously. This provides you with the chance to utilise various skills across different workplaces or apply the same set of skills in diverse environments.

What Are The Drawbacks Of Being On A Zero-Hour Contract?

While there are many benefits of being on a zero-hour contract, there are corresponding drawbacks to it as well. These include the following:

• lack of schedule and structure
• financial uncertainty
• impact on benefits eligibility 

One of the disadvantages of a zero-hour contract is the absence of a consistent and predictable working schedule. The flexibility in working hours can result in irregular workdays, with some days having limited hours while others require longer hours. 

The fluctuating income that comes with a zero-hour contract can make it difficult to effectively manage and budget finances. In months with lower working hours or reduced income, it can be challenging to meet financial obligations, particularly during periods of rising living costs. 

In such situations, taxpayers can be assigned an emergency tax code which increases their tax liability in the current tax term.

Additionally, the irregularity of income may make it harder to obtain loans or other financial services that typically require proof of a stable and regular income source.

The non-rigid nature of working hours and income can potentially affect the eligibility of zero-hour contract workers for certain benefits. Some benefits schemes assess claimants based on their income and working hours. 

Consequently, the variability in earnings and irregular working patterns may impact the ability to qualify for specific benefits or result in adjustments to existing benefit entitlements.

Conclusion:

The above discussion helps to conclude that there is no definitive or uniform tax code applied to workers under a zero-hour contract. Their individual circumstances and income are taken into account for calculating their tax code under a zero-hour contract. If they have multiple sources of income, this tax code can be different from other tax codes assigned to them at their sources of employment.

References:

Different kinds of employment status | MoneyHelper

Zero Hours Contracts | Factsheets | CIPD

Contract types and employer responsibilities: Zero-hours contracts – GOV.UK