K Tax Code: Negative Allowance and the 50% Limit

Most tax codes (L, M, N, T) work by giving you a number that, multiplied by 10, becomes your annual tax-free allowance. Code 1257L means £12,570 tax-free. K codes flip this: the number is the amount added to your taxable income.

K500 means £5,000 added. K1000 means £10,000 added. The "K" prefix is the signal to payroll that the allowance is negative — meaning your deductions exceed the standard personal allowance and need to be recovered through your wages.

This usually happens because HMRC is collecting tax on income you receive from somewhere else without PAYE deductions — most commonly the state pension or company benefits in kind — by reducing the allowance applied to your salary. Once that reduction would push your allowance below zero, the code becomes a K code.

The most common situations that produce a K code:

• State pension above your personal allowance: The State Pension is taxable but paid without PAYE. HMRC can collect the tax through a job or private pension. A £14,000 State Pension exceeds a £12,570 allowance by £1,430, which can contribute to a K code. Other adjustments and coding rules determine the actual code.
• Company car or other significant benefits in kind: A high-value company car can have a taxable benefit of £8,000–£15,000 a year. Combined with private medical cover, fuel benefit, or other perks, the total benefit value can easily exceed the personal allowance and produce a K code.
• Underpaid tax from a previous year: For a P800 underpayment, HMRC normally changes the next year’s code automatically if you owe less than £3,000 and have enough PAYE income above your allowance to cover it. Other debts have different collection rules. An underpayment adjustment combined with other deductions can produce a K code.
• Multiple income sources: If you have several pensions or part-time jobs and HMRC has allocated your allowance to one of them, the others may be on K codes to recover tax that would otherwise be missed.

If a K code were applied without limits, a single payslip could end up with more tax than gross pay — leaving you with zero or negative net pay. To prevent this, HMRC operates a regulatory cap: total tax deducted in any single pay period cannot exceed 50% of your gross pay for that period.

The cap does not cancel tax actually owed. Later payroll calculations or HMRC’s year-end reconciliation can collect an underpayment. If the code was wrong, HMRC must establish the corrected liability rather than treating the restricted calculation as proof of a debt.

If PAYE reaches 50% of pre-tax pay, ask payroll whether the limit restricted the calculation. The limit can apply to a correct code too; it does not prove an error. Compare each coding adjustment with your current income and benefits.

Take an employee earning £40,000 (£3,333 monthly gross) with a K500 code in 2026–27. Because K codes have no personal allowance, the bands apply from £0 of taxable income.

• Annual taxable income: £40,000 + £5,000 (the K500 add-back) = £45,000.
• Basic-rate slice: £37,700 × 20% = £7,540.
• Higher-rate slice: (£45,000 − £37,700) × 40% = £7,300 × 40% = £2,920.
• Annual income tax: £7,540 + £2,920 = £10,460.
• Monthly income tax: £10,460 ÷ 12 ≈ £872.

Compare against a 1257L code on the same £40,000 salary:

• Taxable: £40,000 − £12,570 = £27,430.
• Tax: £27,430 × 20% = £5,486 a year, or roughly £457 a month.

The K500 code costs about £415 more in tax per month than the standard code — collecting around £4,974 a year that the L code would not. K500 represents a net negative tax-free adjustment of about £5,000 after allowances and coding deductions are combined. It does not mean total benefits are only £5,000: check the coding notice to see what created it. This is an annualised England/Northern Ireland illustration; exact PAYE uses the code tables and period rounding.

If the £872 monthly tax exceeded 50% of gross pay (it does not in this example because £872 is 26% of £3,333), the cap would limit the deduction to £1,667 and roll the rest forward. For lower salaries with the same K500 code, the cap is more likely to bite.

See the £40,000 take-home pay page for the no-K-code baseline.

A K code can be correct. Check the coding notice against your current records.

Step 1: Read the P2 coding notice. It lists the adjustments behind the code, such as company benefits and tax being collected. An amount of tax owed is different from the allowance adjustment needed to collect it.

Step 2: Check the underlying records. If a company car or medical cover ended, check that HMRC has the correct end date and benefit value for the year. Update incorrect details in your personal tax account or call HMRC on 0300 200 3300.

Step 3: Compare benefits records. Ask your employer for the relevant payrolled-benefit statement or P11D information. If it differs from HMRC’s figures, ask for a review.

Step 4: Check the correction. A corrected cumulative code with complete earlier pay and tax can recalculate tax to date. Ask which payroll will apply it. The 50% limit restricts deductions, not refunds; a non-cumulative correction does not automatically refund earlier tax.