Thousands of UK workers are discovering an unexpected change on their payslips that is significantly reducing their take-home pay. HM Revenue & Customs (HMRC) is increasingly deploying a specific type of tax code to collect outstanding debts directly from earnings, pushing some individuals into what amounts to a negative Personal Tax-Free Allowance.
Understanding the K Tax Code and Its Impact
The mechanism behind this financial squeeze is the K tax code. Unlike standard codes where a letter follows numbers, such as 1257L, a K code places the letter before the numbers, for example, K784. This signals to your employer that your taxable income should be calculated as being higher than it actually is.
This code is typically applied when you owe HMRC money for historic debts, such as tax return late filing penalties or untaxed benefits. Normally, HMRC would reduce your standard £12,570 Personal Allowance to cover what you owe. However, if the debt is large enough to wipe out your entire allowance, they implement a K code instead.
"We are aware of people being issued with a K code by HMRC to collect historic debts that they think are due, over a short period of time," states the Low Income Tax Reform Group. "In some cases we are hearing of, the amounts that HMRC are trying to collect are quite large."
How a 'Negative Allowance' Works on Your Payslip
To illustrate, if HMRC determines you owe tax on £15,000 of untaxed income or benefits, you might receive a tax code of K243. This number is calculated by subtracting your £12,570 Personal Allowance from the £15,000 debt, leaving £2,430. This £2,430 is then divided by 10 to create the number in the tax code—K243.
Your employer will then treat your income as if it were £2,430 higher than it is, resulting in more tax being deducted through the PAYE system. This effectively functions as a negative Personal Allowance.
There is, however, a crucial safety net. Due to official rules, no more than half of your pre-tax pay can be taken because of a K tax code, offering some protection against extreme deductions.
What to Do If You Have a K Tax Code
Experts warn that it is your responsibility to ensure your tax code is correct. If you notice a sudden drop in your net pay or spot a K code on your payslip, you must act promptly.
"If you think your tax code’s wrong, you need to contact HMRC to make sure they have the information they need to put it right," advises tax firm RIFT. The group also highlights that HMRC may be using this method to collect debts that the taxpayer may not even agree are due, making it essential to verify the claim.
Checking your most recent payslip is the first step. If the tax code begins with the letter K, it is likely HMRC is recovering a debt. Contacting HMRC directly is the recommended course of action to query the debt, discuss repayment options, or correct any errors to prevent further financial strain.
