HMRC is reducing the Personal Tax Free Allowance for individuals with a specific letter on their tax slips. K codes are a type of tax code that result in more tax being collected from wages through the PAYE system.
What Are K Tax Codes?
K codes are designed to collect additional tax when an individual owes tax from previous years or has benefits that need to be taxed. The Low Income Tax Reform Group stated: "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. In some cases we are hearing of, the amounts that HMRC are trying to collect are quite large."
If your tax code has recently changed to a K code, or you have noticed any other change that has significantly decreased your take-home pay, it may be that HMRC is trying to collect debts, such as tax return late filing penalties, via your tax code.
How to Identify a K Code
You can check for a K code on your most recent payslip. In a K code, the descriptive letter is placed in front of the tax code number, for example, K784, rather than after it, as in the standard 1257L code.
How K Codes Work
RIFT explains: "Let's say you qualify for a standard Personal Allowance of £12,570, but you have some unpaid tax from a previous year and/or some tax to pay for the benefits you're getting. Normally, on a standard L tax code, you'd simply have your tax-free Personal Allowance reduced to account for the extra tax you owe. However, if you owe enough this way to use up your entire Personal Allowance, you'll be given a K tax code instead for the extra."
For example, if HMRC decides you owe tax on £15,000 of income or benefits that you aren't already being taxed on, you might be given a tax code of K243. This tells your employer to count your income as if it were £2,430 higher when calculating how much tax to deduct, effectively creating a negative Personal Allowance.
Protection Rules
Despite the potential impact, there are rules to provide some protection. Whatever tax you owe, you cannot have more than half of your pre-tax pay taken out because of a K tax code.
What to Do If Your Tax Code Is Wrong
Most of the time, HMRC will alter your tax code automatically as your circumstances change. However, if you end up on the wrong tax code, it is your responsibility to get it fixed. If you think your tax code is wrong, contact HMRC to ensure they have the correct information. If you are claiming a tax rebate with RIFT, they will check your tax code as part of their service and correct any errors.
