Thousands of UK households are seeing their take-home pay unexpectedly slashed due to a little-known HM Revenue and Customs (HMRC) mechanism known as the 'K' tax code. This code is applied when a taxpayer's so-called 'minus allowances' result in them owing more tax than their standard personal allowance can cover.
What is a 'Minus Allowance' and the K Tax Code?
Tax experts warn that certain items which reduce your annual tax-free Personal Allowance can sometimes add up to a total greater than the allowance itself. This creates a 'minus allowance' situation. Instead of having an amount of income you can earn tax-free, you are treated as having extra taxable income from the outset.
To collect the tax on this extra income, HMRC issues a special tax code beginning with the letter 'K'. The code is calculated by taking the minus allowance figure, dropping the last digit, and subtracting one. For example, a minus allowance of £2,970 would result in a tax code of K296.
How K Codes Impact Your Pay Packet
While K codes are designed to recover tax, there is a legal limit on how much can be deducted. No tax code can result in your employer or pension provider taking more than half of your pay or pension for that period. So, if your monthly pay is £300, the maximum tax deduction under a K code would be £150 for that month.
However, this can still represent a severe and sudden reduction in income. The Low Incomes Tax Reform Group (LITRG) states that K codes are sometimes used by HMRC to collect old debts, such as penalties for late tax return filing.
What to Do If You Have a K Code
The first sign of a problem is often a payslip showing less money than expected. The LITRG advises checking your most recent payslip for a code starting with 'K', such as K784, instead of a standard code like 1257L.
"The debt HMRC are trying to collect may be very old," the group notes. "You may not have received any recent correspondence about the debt... For many different reasons, you may not have received the notification that HMRC should have sent."
If the reduced income causes significant financial hardship, it is crucial to contact HMRC immediately to discuss your situation. You may be able to arrange an alternative payment plan for any debt, rather than having it recovered directly from your wages through your tax code.
