Help! My PAYE code has recently been changed to a K code
We have recently heard about individuals who have had their tax code changed - to a K code - to collect a tax return late filing penalty debt. This has severely affected their take-home pay. In this article we tell you what to do if this has happened to you.
K codes are a type of tax code that will result in more tax being collected out of your wages, via the PAYE system. More information about the PAYE system and K codes can be found at the end of this article.
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 to your code that has resulted in a significant decrease to your take home pay - it may be that HMRC are trying to collect debts, like tax return late filing penalties, from you via your tax code. You should be able to tell if you have a K code by looking 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, such as in the standard 1257L code.
| Important points to note: The debt HMRC are trying to collect may be very ‘old’. You may not have received any recent correspondence about the debt, for example, offering you a chance to clarify or dispute the debt. For many different reasons, you may not have received the notification that HMRC should have sent about your PAYE code change - in fact, the first you may have heard about it was when your take home pay was less than you were expecting in a recent pay period. |
In some cases, HMRC may be trying to collect tax return late filing penalties in situations where it may be possible to challenge them, for example:
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Where you registered to complete a tax return but did not actually meet the criteria for one (meaning HMRC can often withdraw it and remove any late filing penalties)
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Where you have a ‘reasonable excuse’ for not filing your tax return on time (meaning you can appeal the late filing penalties)
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Where HMRC issued a tax return to try and collect a PAYE underpayment that has gone unpaid, but the PAYE underpayment arose due to an employer error (meaning HMRC should have attempted to collect the underpayment from the employer in the first instance rather than issue a tax return to the employee).
What to do
If you are not sure why your tax code has changed, ask HMRC as soon as possible. You could do this by calling HMRC or by checking online in your Personal Tax Account (PTA). If you have not yet set up your PTA see our guidance on how to do this.
If you think that any of the bullet points above could apply you should seek professional advice. See our getting help page for more details, including on how to get free tax advice if you are on a low income from the charities TaxAid or Tax Help for Older People.
Even if you think that the late filing penalties (or other tax debt) may be correctly due, the sudden drop in your income as a result of the coding change due may be causing you financial difficulty. If you are struggling to meet your day-to-day expenses, you can contact HMRC and tell them the inclusion of the debt in your tax code is causing you ‘hardship’.
If HMRC agree that it is causing you hardship, they may be able to organise another way to repay what you owe, for example in instalments outside the PAYE system. This means HMRC can change your code back to what it was, although please be aware that interest may then start running (whereas it doesn’t run while debts are being coded out). Or they may be able to give you a PAYE code that collects the amount due over a longer period. Once this is in place and the change filters through to your PAYE code, you should see an increase in your income once again.
If you are on a low income, it is possible that any extra deductions that are made under your PAYE code to collect a tax debt will affect your entitlement to means-tested benefits, as often entitlement to these benefits is calculated on your after-tax income. This means your means-tested benefit may increase because your after-tax income has fallen. You should contact JobCentre Plus, The Pension Service and/or your local authority to advise them of your reduced income due to the extra tax you are paying and ask how it affects your entitlement. Alternatively you can seek a benefits review from a charity providing welfare rights advice or you could use one of the benefits calculators referred to on GOV.UK.
If you are in serious debt and feel overwhelmed or at crisis point, we recommend you consider taking further advice from a debt specialist, such as Citizens Advice, StepChange or Business Debt Line. In some cases, debt advisers can help you access a scheme called ‘breathing space’. This scheme covers HMRC debts, including those being collected via PAYE codes, and can provide legal protection from creditor action for 60 days, to relieve pressure and to give you a chance to consider other debt solution options with a debt specialist.
Links to more detail
The way you pay income tax on employment (or private pension) income is via the Pay As You Earn system. PAYE spreads your income tax over the tax year, which starts on 6 April of one year and ends on 5 April in the next. Your employer deducts tax from your wages – in accordance with a tax code - before paying you the balance. Your employer is responsible for sending the tax on to HMRC. Employers are sent your tax code by HMRC, they do not choose it themselves and cannot make changes unless HMRC tell them to.
Usually, you will have the standard tax code of 1257L. This code tells your employer that you have a tax-free personal allowance of £12,570 to set against that employment income over the course of the year. In some cases, your tax code might be different to this – it could be higher if you are claiming additional tax relief via your tax code. Or it could be lower if tax is being collected on other types of income through your tax code – such as state pension or property income, where tax is due but is not collected at source. By lowering your tax code, HMRC are telling your employer to reduce your personal allowance, so that more of your income is subject to tax. You can read more about tax codes generally on our page How do I check my coding notice?.
HMRC currently have the power to use tax codes as a way to collect debt due to HMRC. This is subject to protections already built into the system, mainly that not more than 50% of pay can be deducted as tax under PAYE. More details of HMRC’s debt collection power can be found here. We are currently looking at whether there have been any recent changes to HMRC's debt recovery policies or processes in this area.
Normally, as explained above, a PAYE code tells your employer the amount of personal allowance you are due so that tax can be calculated on the rest of your income. A K code not only reduces the amount of personal allowance given to you to zero but adds on a notional amount of income to be taxed, as explained here. So by using a K code to collect the debt, your take home pay will suddenly reduce, perhaps significantly.
HMRC’s internal PAYE manual setting out their procedures with regards to coding objections, including around K codes and hardship claims, can be found here.