Tax codes represent how much tax to deduct from an employee’s paycheck. They are alphanumeric, with L being the most common (1257L for the current tax year), attached as a suffix and indicates the taxpayer’s eligibility for the Personal Allowance.
However, at some point, PAYE workers may suddenly get a K code. Unlike the standard tax code, the K tax code comes before the numbers and implies a complicated tax policy. The unwarranted tax code change can be confusing to so many taxpayers.
So, what is K tax code, and why do some people have it? Find out about the K tax code definition and other details below.
What Is K Tax Code?
Individuals with untaxed income (e.g., pension, benefits in kind, previous tax year’s bill) exceeding their Personal Allowance will usually receive the UK tax code K. But what does K tax code mean HMRC?
The K code is also known as a ‘negative’ tax code, for in HMRC’s perspective, the unpaid tax liabilities are considered ‘additional income.’ These untaxed incomes may push the individual to higher tax brackets, hence, increasing tax bill.
This code works the other way from the standard tax code. The K comes as a prefix, and instead of reducing the taxable income through the annual tax-free allowance, its effect is reversed—it makes the tax charge bigger. It happens as the untaxed incomes are added to the gross income, using up all the Personal Allowance as a result.
Most of the time, some incomes are not taxed when taxpayers are caught in the following situation:
- Underpaying tax in the previous tax year.
- Paying taxes for their previous year’s tax bill through their salary or pension income.
- Receiving benefit in kind from their employees or government benefits.
Taxpayers may most likely get a K code, too, when they receive pension alongside their PAYE income. Other instances may be when they underpaid taxes in the previous year, or they incurred penalties for filing taxes beyond the tax deadline.
Underpaid tax will position them for HMRC’s historic debt collections. What to do in this situation, see more below. Take note that the PAYE tax code K only affects income tax, not National Insurance (NI). NI rates remain even after getting a K tax code.
Visit relevant guide on how to pay benefits in kind (BIK) taxes aside from using the P11D tax form or payroll: What Is the PAYE Settlement Agreement (PSA) UK? This guide also covers the various types of benefits in kind.
How Does the K Tax Code Work?
What is a K tax code used for, and how does it work? HMRC simply uses the K tax code when the taxpayer’s untaxed income exceeds the Personal Allowance. For example, an employee who receives a £15,000 benefit in kind will exceed the tax-free allowance by £2,430.
This is why HMRC also classes untaxed earnings as ‘minus allowances’ or ‘negative allowances,’ as they deduct the tax-free allowance of a taxpayer, ultimately resulting in a higher tax bill. In the example above, the taxpayer will soon get a K tax code of K243 in their pay slip.
Pay As You Earn taxpayers who are used to the standard tax code are usually caught off guard when it changes into a K code. Understanding the tax regulations around the K code is important, especially for those who have multiple PAYE jobs.
Learn more about the UK list of tax codes and what they mean.
What to Do If You Are Given Tax Code K?
When HMRC updates a tax code to a K code, the tax office normally sends a notice of coding P2 to the taxpayer outlining their K code meaning, a breakdown of their new tax code. However, if taxpayers get a K code without a clear explanation, they must contact HMRC or use their Personal Tax Account as soon as possible, as mistakes may occur anytime, especially when tax codes from previous years are incorrectly carried over.
Tax codes can be adjusted, so long as taxpayers notify HMRC. Take, for instance, HMRC’s historic debt collections. If they believe the debt is incorrect or unfair, taxpayers can challenge HMRC. Situations like erroneous tax returns or employer errors leading to underpayments can also be disputed. Taxpayers may also appeal to revise the tax code if the deductions cause them financial hardship or request HMRC to consider alternative repayment arrangements.
What Happens If You Overpay Tax with a K Code?
Whether on a K code or not, if an individual is on the wrong tax code, they might end up paying an incorrect amount of tax. This may occur if they change jobs and the new employer lacks proper tax information, fail to claim Marriage Allowance tax benefits from a spouse, or if their expenses fluctuate year-to-year and HMRC adjusts the tax code inaccurately.
When a K code is corrected within the current tax year, the refund should be automatically processed through the salary, but for overpayments from previous years, taxpayers may need to contact HMRC and verify any tax calculations.
Learn more about owing a tax refund in this article: Am I Owed a Tax Rebate UK?
Other Tax Code FAQs
Receiving pension whilst still earning from PAYE work or paying tax for the previous year through pension income may result in the taxpayer getting the K tax code.
HMRC assigns a K code when an individual’s deductions, such as company car benefits, exceed their personal allowance, resulting in negative allowances being treated as additional income.
A K tax code in the UK indicates that an employee’s deductions for benefits, state pension, or past taxes exceed their Personal Allowance, and the number following K, multiplied by 10, is added to their taxable income before deductions.
In the UK taxation system, the K in the Unique Taxpayer Reference (UTR) and tax code are different. The K tax code comes as a prefix and defines how much the employer should deduct from the employee’s PAYE tax, whilst the K in UTR comes last after the ten digits and is used by HMRC for their own payment reference.
If the tax rebate is not settled through PAYE tax, an individual may contact HMRC, whilst if self-employed, they can file a tax return. Read our Comprehensive Self Assessment Guide for Beginners to have an upper hand on taxes every tax filing season.
Need More Advice? Talk to Legend Financial
What is K tax code and why did you get it? If you are not sure why you got a K tax code, or believe that HMRC is making an erroneous coding, you can always dispute it. Legend Financial is here to help you straighten up your tax code and every other tax affair. Accuracy and tax efficiency are only a few of the things we keep in mind whilst assisting our clients. Reach us today!
