HMRC's 'K' Tax Code Creates Negative Personal Allowance for UK Households
A significant alert has been raised regarding a specific tax code appearing on payslips across the United Kingdom, which is leading to unexpected deductions for numerous individuals. The tax code in question, marked with a 'K', signifies that a person's income or deductions surpass their tax-free Personal Allowance and are not currently subject to taxation through other means.
Understanding the 'K' Tax Code Mechanism
This situation typically arises under several circumstances, including when individuals are repaying owed tax from prior years through their wages or pension payments, or when they receive State Pension or taxable state benefits. Additionally, it can occur when employees benefit from company perks such as a company car, or when savings interest exceeds the Personal Savings Allowance, requiring tax payments.
Employers and pension providers utilize the K tax code to ensure that tax is collected for this additional income or deductions directly from the relevant employment or pension source. Importantly, there are protective measures in place: employers and pension providers are prohibited from deducting more than half of an individual's pre-tax wages or pension when applying a K tax code.
Real-World Example of the Negative Allowance
To illustrate, consider a scenario where an individual qualifies for the standard Personal Allowance of £12,570 but has unpaid tax from a previous year or owes tax on benefits received. Under a standard L tax code, the Personal Allowance would simply be reduced to account for the extra tax owed.
However, if the amount owed is sufficient to completely utilize the entire Personal Allowance, a K tax code is assigned instead. For instance, if HMRC determines that you owe tax on £15,000 of income or benefits not otherwise taxed, you might receive a tax code of K243. This instructs your employer to treat your income as if it were £2,430 higher than it actually is when calculating tax deductions, effectively creating what is known as a negative Personal Allowance.
While this may sound concerning, regulations provide a safeguard: regardless of the tax owed, deductions due to a K tax code cannot exceed 50% of your pre-tax earnings, offering a layer of financial protection for affected households.
