Most tax codes give you an allowance. A K code does the opposite, adding income to your pay before tax. Understanding it explains why a company car can quietly raise the tax on your salary.
Nearly every UK tax code gives you something: a slice of tax-free income. The K code is the rare exception that takes instead of gives. Rather than subtracting an allowance from your pay before tax, it adds income on top, and for company car drivers and high benefit users, that reversal can come as a nasty surprise.
A standard tax code like 1257L works by subtracting your £12,570 Personal Allowance from your pay, so only the rest is taxed. HMRC arrives at the number by adding your allowances and subtracting any deductions, such as the value of a benefit in kind.
When those deductions grow larger than your allowance, the result is negative. HMRC cannot give you a negative allowance, so it flips the logic: the surplus becomes extra income that is added to your pay before tax is calculated. To signal this, the code carries a K prefix instead of a trailing letter. K400 means £4,000 of notional income is added across the year.
Two situations most often push your code into K territory. The first is large taxable benefits: a company car with high emissions, fuel, and private medical insurance can together be worth more than £12,570, swallowing your entire allowance and then some. The second is recovering tax you underpaid in an earlier year, which HMRC loads into your current code as a deduction.
State pensions can also cause it. The State Pension is taxable but paid without tax deducted, so HMRC reduces (or reverses) the code on a person's other income to collect the tax due, which for higher pensions can produce a K code.
Tom earns a £45,000 salary in 2025/26 and has a company car with a taxable benefit value of £9,500 plus private medical insurance worth £1,400, totalling £10,900 in benefits. He also owes £4,500 from an earlier underpayment that HMRC is recovering through his code.
His deductions are £10,900 + £4,500 = £15,400, against a Personal Allowance of £12,570. The deductions exceed the allowance by £2,830. HMRC turns that into a negative allowance and issues code K283 (£2,830 ÷ 10, rounded). On a monthly payroll, that adds about £236 of taxable income to each payslip, so Tom is taxed on roughly £3,986 a month (£3,750 salary plus £236) at his normal rates.
The 50% rule protects him from extreme deductions: HMRC can never use a K code to take more than half his gross pay in any single period, with any excess carried forward. The check my tax code tool helps confirm whether the benefit values feeding your K code are accurate.
A K code is not a fine. It is HMRC's way of collecting tax on perks and past debts gradually, instead of hitting you with one large bill.
Because a K code adds income rather than subtracting it, there is a built-in safeguard: the regulatory overriding limit. No K code can deduct more than 50% of your gross pay in a single pay period. If the calculated deduction would breach that, the excess is held over to the following period. This stops someone with a modest salary but large benefits from being left with almost nothing on payday. If your K code ever seems to be taking more than half your pay, that is a red flag worth raising with HMRC immediately, since it usually points to an error in the underlying figures. Our full K code guide explains how to read and challenge yours.
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