PAYE11095 - Coding: codes: how they are used and calculated: K codes

The primary intention of K codes is to

However, the system will allocate a K code in all cases where deductions exceed allowances.

K code example

Current primary employment tax code allowances are 11,500 and a company car benefit of 13050 is included in the code. The following steps are applied to calculate the K code

  • 11,500 – 13,050 = -1,550
  • Drop the last digit and the minus sign = 155
  • Reduce the last digit by 1 = 154
  • Add a K to the front of the code = K154

Where a K code has been generated you should check that the intended code will not trigger the 50% overriding limit. The system will calculate that the tax due for the individual is equal or more than 50% of their total income and display a message. Take the action given in Action guide tax80002 in these cases.

The tax deducted on any one day cannot exceed 50% of the gross pay for that period. There is no benefit to the employee or HMRC issuing a code where it is known that insufficient tax will be deducted resulting in an underpayment at the end of the year. Depending on the deductions present you may need to consider an alternative way of collecting the tax due, such as asking for a voluntary payment in underpayment cases prior to 2016 to 2017 tax year or putting the case into SA. For the 2016 to 2017 tax year and beyond Simple Assessment will replace voluntary payments.  In these cases you will need to remove any non-PAYE income or underpayments included in the code calculation. On the income, allowances, benefits and deductions area make the appropriate entry in the Non Coded Income field (PAYE130035).

Whether any non-PAYE income can be included in a code depends on the individual's circumstances. It is not usual to include income returned on the self employment pages of the SA return in the code. Action guide tax80002 can be used to determine what deductions can be included in the code.

Notes:

  • From 6 April 2016, if the S prefix is included in the tax code, for example SK100, tax is deducted at the appropriate total rate for Scottish taxpayers. Further information is held at PAYE100035.

  • From 6 April 2019, if the C prefix is included in the tax code, for example CK100, tax is deducted at the appropriate total rate for Welsh taxpayers. Further information is held at PAYE100040.