Households across the UK are seeing changes to their income tax as HMRC applies ‘minus allowances’, reducing take-home pay through specially assigned K tax codes. This adjustment, tied to unpaid debts or benefits received, is affecting employees and pensioners without prior warning in some cases.
The government’s revenue agency is now using K codes, typically reserved for complex cases, to recover old debts and unpaid tax liabilities, leaving many earners with less than expected pay or pension. This approach has raised concern among tax experts, especially given how little communication some people have received beforehand.
Unexpected Deductions Raise Concerns for Paye Taxpayers
HM Revenue and Customs (HMRC) is assigning K tax codes to some UK residents whose deductions exceed their tax-free personal allowance. These “minus allowances” are treated as additional income, which means more tax is collected through PAYE. According to information from the Low Incomes Tax Reform Group (LITRG), a K code is used when reductions, such as benefits in kind or outstanding tax debts, outweigh a taxpayer’s standard allowance.
HMRC calculates the K code by dropping the last digit of the minus allowance and subtracting one. For example, a negative allowance of £2,970 results in a K296 tax code. This leads to higher tax deductions, though rules limit the amount withheld, tax cannot exceed half of the employee’s gross pay in any pay period. Therefore, if someone earns £300 a week, no more than £150 can be deducted under a K code.
These codes are often used to recover underpaid tax or late filing penalties and can significantly impact a person’s income. The LITRG notes that many affected individuals are unaware of the changes until they notice a drop in their net pay.
This is partly because HMRC’s notifications may not reach the taxpayer or may refer to historic debts that were not clearly communicated. “You should be able to tell if you have a K code by looking on your most recent payslip,” LITRG advises. “The debt HMRC are trying to collect may be very old.”
Savings Interest Rules May Also Lead to Unexpected Tax Liabilities
HMRC has also issued a separate warning on tax obligations related to savings interest, stating that taxpayers could unknowingly exceed the limits of their tax-free allowances. While most people can earn interest on savings without paying tax, this depends heavily on their other income.
According to HMRC, the Personal Allowance, currently set at £12,570, must first be used against income from wages, pensions or other sources. If this allowance is fully used, only the Personal Savings Allowance (PSA) applies. The PSA allows basic-rate taxpayers to earn up to £1,000 in savings interest without tax, while those with very low incomes can also benefit from a £5,000 starting rate for savings.
This means someone earning less than £12,570 from employment or pension could also receive up to £5,000 in interest tax-free. But once income exceeds that threshold, every additional pound reduces the savings rate by the same amount. For instance, if someone earns £16,000 in wages and £200 in savings interest, the remaining savings rate is calculated as £5,000 minus £3,430, leaving £1,570 in tax-free interest, according to HMRC.
Anyone earning £17,570 or more in income loses access to the starting rate completely. This has implications for pensioners and low-income savers who may assume their interest is untaxed, only to find they owe tax after the fact. Understanding how earnings interact with allowances is essential to avoid surprise deductions.
