Tax codes are reduced to reflect anticipated benefits in kind so, for instance, an employee who receives £1,000 worth of benefits will have a 710L code rather than the standard 810L code. A K tax code means that they're receiving benefits in kind ("untaxed income") which are greater than their personal allowance, i.e. more than £8,105 in 2012/13.
A K497 codes means that the employee has benefits of roughly £4,970 in excess of their personal allowance or, in other words, total benefits in kind of £13,075 (being £4,970 + £8,105). The K tax code (assuming it's right) ensures that the employee is taxed on the benefit in kind throughout the year rather than it being ignored and the employee then facing a big tax bill after the end of the tax year.
If the employee isn't receiving any benefits in their new job, they should ring HM Revenue & Customs and ask them to change their tax code back to the standard 810L tax code.
-- Edited by Robert Pearce on Thursday 21st of March 2013 03:33:22 PM
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Pearce & Co - Chartered Accountant and Chartered Tax Adviser
Is anyone else experiencing huffing and puffing and 'do you not know this already?' or 'it's on the HMRC website', from HMRC's 'help' lines? I'm getting extremely annoyed at the attitude I'm receiving from both HMRC and sage support.
I have read the information about K codes on the website but I am not fulling understanding what it means and would like someone to clarify further.
I have entered a new employee with a P45 onto the system. They have a tax code of K1131 W1M1. In their new employment they won't be receiving any benefits etc just a set £1000 per month. The tax and NI deducted in the first month is £388.60 for NI and £44.16 for tax. Is it right that the K code is still used in this new employment even though they don't have any benefits like they did in the previous job.
What is the difference between untaxed income and tax free allowance?
If your deductions (untaxed income on which tax is still due) are more than your allowances you'll be given a K code - could someone put this into my single braincell in a different way please? Or give me an example.
The number in a K code multiplied by ten broadly indicates how much must be added to your taxable income to take account of the excess untaxed income you received - and again for this I really have no idea what this means and its annoying me that its not making sense to me
K497 means:
your untaxed income was approximately £4,970 greater than your taxable income - what is untaxed income? Is this your tax free allowance? And the taxable income would be say £8105?
as a result, approximately £4,970 must be added to your total taxable income to ensure the right amount of tax is collected - again what would be taxable income? Is this anything above the tax free personal allowance?
At the end of the day it isn't the payroll operators job to second guess the PAYE/NI system. Just use the codes that you're told to use by P45/P46/P6/P9.
If the employee thinks their tax code is wrong for their circumstances it is for them to question with the tax office not with their employer or their payroll bureau. Don't worry about things that are neither your concern, nor are you allowed to do anything about them.
Thank you both that is really helpful! And its good to know that this is something I shouldn't be worrying about but something for the employee to question. I look way to far into things sometimes. Well alot of the time!
