Tax Code K | What It Means and How It Affects Your Pay?

Understanding your tax code is essential, especially when it comes to HMRC’s K code. A K tax code means you have untaxed income that exceeds your Personal Allowance, resulting in higher tax deductions.

Whether due to benefits in kind, underpaid tax, or pensions, the K code can significantly impact your take-home pay.

This guide explains how the K code works, why it’s applied, and what steps you can take if it affects your income unexpectedly.

What Is the K Tax Code?

The K tax code is issued by HMRC when an individual’s untaxed income exceeds their standard tax-free Personal Allowance.

This means that instead of receiving a tax allowance, the taxpayer effectively has an increased taxable income, leading to higher tax deductions through the PAYE (Pay As You Earn) system.

HMRC assigns this code in scenarios where unpaid or untaxed income needs to be collected. Rather than waiting for a lump sum payment, the K tax code allows HMRC to spread the tax collection over the course of the year, deducting it directly from the individual’s salary or pension.

The reason it’s referred to as a “negative” or “reverse” tax code is because it functions in the opposite way to most other tax codes.

Instead of reducing your taxable income by applying an allowance, it increases your taxable income by a certain amount.

K tax codes are typically assigned in cases where the total value of untaxed income such as benefits in kind, pensions, or historical tax debts exceeds the standard Personal Allowance.

HMRC sees these unpaid tax liabilities as additional income that needs to be recovered through higher deductions.

How Does the K Tax Code Work in the UK?

The mechanics of the K tax code involve adding a notional amount to the taxpayer’s income, representing untaxed liabilities from previous years or current benefits that have not been taxed at the source.

This additional amount is determined by how much the untaxed income surpasses the annual Personal Allowance.

If the Personal Allowance for a given year is £12,570 and an individual has untaxed income worth £15,000, the excess £2,430 becomes subject to tax.

HMRC will then issue a K code of K243, meaning that an additional £2,430 will be added to the taxpayer’s salary for tax purposes.

This inflated figure is used purely for calculating the tax due. It does not mean the person is receiving more income, but rather that the system is treating their untaxed income as if it were added to their gross salary. Tax is then calculated on this inflated figure using standard PAYE rules.

The amount represented by the K code is spread out over the year’s pay periods.

HMRC restricts how much can be deducted through a K code so that deductions do not exceed 50% of the employee’s gross pay in any given pay period.

Example of K Tax Code Application

In this scenario, although the person earns £30,000, the tax is calculated as if they earned £32,430, increasing their tax liability accordingly.

When Might Someone Receive a Tax Code K?

HMRC uses the K tax code in specific situations where the taxpayer owes money from previous tax years or receives taxable benefits and pensions that are not deducted at the source. Common circumstances include:

• Underpayment of tax in previous years
• Receipt of benefits in kind from an employer, such as company cars or private healthcare
• Taxpayers receiving a state pension that is not taxed at source
• Choosing to pay a previous year’s tax bill through PAYE
• Individuals receiving both pension and employment income

Receiving a K code is not unusual for those with multiple income streams or benefits.

HMRC may also assign a K code if an individual’s tax affairs are not up to date or if there is confusion about employment history or benefits received.

Sometimes, even when there is no current untaxed income, a K code may appear due to errors in records or incorrect assumptions made during automatic tax code updates.

In such cases, it is essential to verify the coding notice or contact HMRC for clarification.

What Should You Do If You Receive a K Tax Code?

If an individual is assigned a K tax code, HMRC typically issues a P2 coding notice detailing the components that led to the new code.

This notice provides a breakdown of any underpayments, benefits, or adjustments included in the new code.

If the notice is unclear or if the taxpayer did not expect such a change, they should:

• Log into their HMRC Personal Tax Account to cross-check the figures
• Speak to HMRC directly for clarification
• Request a correction if the figures or assumptions used are inaccurate

It’s also possible that tax codes from previous years have been carried over incorrectly or that income from a former job is still being factored into the calculations.

If the issue stems from an employer’s error or incorrect submission of benefit information, HMRC can investigate and amend the code accordingly.

In certain situations, taxpayers can challenge the application of a K code.

For example, if the additional deductions cause financial strain or hardship, HMRC may agree to an alternative payment arrangement or consider writing off part of the debt if deemed irrecoverable.

Can You End Up Overpaying Tax with a K Code?

Overpaying tax due to an incorrect K code is a common issue. This can happen for several reasons:

• Inaccurate or outdated employer records
• HMRC incorrectly calculating previous tax debts or benefits
• Not claiming available tax allowances, such as Marriage Allowance
• Job changes where proper tax information was not shared

If a taxpayer is on the wrong code, it can result in paying more tax than necessary. When detected within the same tax year, HMRC usually adjusts the code and refunds any overpaid amount via salary.

For overpayments from prior years, the taxpayer must contact HMRC to initiate a manual refund process.

This involves checking previous P60s, payslips, and notices to determine the extent of overpayment.

Maintaining accurate records and checking tax codes regularly can help reduce the risk of overpaying.

Taxpayers should ensure that all tax reliefs are claimed and reported to HMRC annually.

Common Triggers for Overpayment

How Does a K Tax Code Affect Your Take-Home Pay?

The main impact of a K tax code is that it increases the amount of tax deducted from your income. Since the tax is calculated on a higher notional income, net pay is reduced accordingly.

The more untaxed income involved, the higher the K code number, and the more tax that will be deducted.

For instance, a K100 code means an additional £10,000 will be added to the income for tax calculations.

This is divided across the year and increases the monthly tax deduction. It does not reflect actual additional income, but rather how much tax HMRC believes should be collected.

The result is that employees and pensioners with a K code will see less in their pay packet or pension payments than they might expect.

This can be particularly difficult to manage for individuals living on fixed incomes or tight budgets.

Employers and pension providers must apply the K code as directed by HMRC and have no discretion in adjusting it.

It is the taxpayer’s responsibility to challenge or correct any inaccuracies through direct contact with HMRC.

What Is the Relationship Between Tax Code K and National Insurance?

It’s important to note that National Insurance contributions are not affected by the K tax code. NI is calculated based on actual earnings, not adjusted taxable income.

This means even if your tax code includes a K adjustment, your NI payments remain consistent with your gross pay.

This distinction is often misunderstood. While a K code changes how income tax is applied, it does not influence NI rates, thresholds, or deductions.

Therefore, taxpayers should evaluate both their tax and NI deductions separately to get a full picture of their total contributions and ensure everything aligns with expected take-home figures.

How Can You Avoid Getting a K Code in the Future?

Avoiding a K code involves maintaining clear and up-to-date tax records, communicating changes in income or benefits, and proactively managing any tax liabilities.

While not every instance of a K code can be prevented, the likelihood of receiving one can be reduced with good financial habits.

Key steps to avoid a K code include:

• Submitting self-assessment tax returns on time and with accurate figures
• Informing HMRC promptly when starting or stopping a job or pension
• Regularly reviewing tax codes in your HMRC Personal Tax Account
• Reporting all sources of income, including freelance or investment earnings
• Ensuring benefits in kind are correctly reported by employers
• Paying any owed tax from previous years directly rather than through PAYE

By taking these steps, taxpayers can keep their tax code accurate and avoid the surprise of higher deductions due to a K code.

Conclusion

The K tax code plays a crucial role in HMRC’s effort to collect unpaid tax, but it can lead to confusion and financial pressure if misunderstood.

Knowing why it’s applied and how it alters your taxable income empowers you to act early, correct mistakes, and avoid unnecessary deductions.

By staying informed, updating HMRC on income changes, and regularly reviewing your tax records, you can better manage your tax responsibilities and minimise surprises in your pay.

FAQs About the K Tax Code

What does the “K” in tax code K stand for?

The “K” signifies that the individual’s untaxed income exceeds their Personal Allowance, resulting in additional taxable income being added.

Is tax code K a penalty?

No, it’s not a penalty. It’s a method used by HMRC to collect unpaid taxes or tax on untaxed income via the PAYE system.

How often does HMRC update tax codes?

HMRC reviews and updates tax codes annually or when there is a change in your income, benefits, or tax liabilities.

Can a K code be removed?

Yes, if the circumstances causing the K code are resolved or incorrect, HMRC can remove or revise it.

Why did I suddenly get a K tax code?

You may have underpaid tax, started receiving benefits in kind, or your income details may have changed.

Will my employer explain my K code?

Employers typically do not calculate tax codes—they implement what HMRC sends. Contact HMRC for clarification.

What should I do if I can’t afford the deductions from a K code?

You can request that HMRC review your code or ask for an alternative repayment plan if it causes financial hardship.