Unable to reconcile tax code change

Change resulting in too much tax being deducted?

Didn't find your answer?

My client, a higher rate taxpayer, received an occupational pension of approximately £3,717 per month gross throughout 2023/24, and the tax code on this source of income changed midway in the year from 239L to K762X.  The net pension received in consequence reduced from £3,014/month down to £2,680/month.

Prior to the change, monthly free pay (Table 1) for 239L would be (approx.) £200, so tax deducted = 20% x (3,717 – 200) = 703.40; £3,717 gross – £703 tax = £.3,014 net.

After the change, additional pay (Table 1 again) for K762X is approx. 637, so I’d have expected tax deducted to be 20% x (3,717 + 637) = 870.80, and net pension to be £3,717 – £871 = £2,846 – not £2,680/month.

It appears that after the tax code change, £1,037 tax has been deducted each month, which equates to a tax rate of 1,037/(3,717 + 637) x 100% = 23.8%.

My understanding was that when K codes are used, the escalated gross income is taxed at the basic rate, 20%.  Is that correct, or am I missing something here?

 My client will be unable to obtain the 2023/24 P60, for reasons I’ll not go into here, but we can safely assume that income tax is the only deduction made from this pension.

Replies (7)

Please login or register to join the discussion.

avatar
By Not Anonymous
13th Apr 2024 16:39

You appear to have overlooked the fact that the code was (unsurprisingly) issued on a non cumulative basis and therefore £3,717 + £636 for the K code adjustment would mean some 40% was deducted, not just 20%.

A K code doesn't mean the normal tax tables aren't used.

Thanks (1)
avatar
By Jane Wanless
13th Apr 2024 16:44

A K code works by adding an amount of income to the salary/pension, rather than deducting an amount. If the income and code are large enough, this can push deductions into higher rates.
£3717+600+ results in £4317+per month, and 12 times this would be over £50k taxable, so part would be taxed at 40%.

Thanks (1)
avatar
By FactChecker
13th Apr 2024 17:11

TBH I've not bothered to work through your figures (it's a sunny weekend evening), but you say "My understanding was that when K codes are used, the escalated gross income is taxed at the basic rate, 20%. Is that correct, or am I missing something here?"

And the answer to that is .. No, you're not correct.

What you refer to as the 'escalated income' is the result, unlike all other tax codes where the basic principle is that the integer portion (after multiplying by 10) represents that person's tax-free allowance, of a K code determining that an additional taxable amount will be added to your income before tax calcs.
However this has no direct bearing on the rate at which taxable earnings will be taxed ... they will follow the usual rules (and of course the result of the K code may mean that part are taxed at HR).

EDIT: I see others have beaten me to it (must stop going to make a coffee in the middle of typing) - and have both made the same correct point.

Thanks (5)
Replying to FactChecker:
avatar
By FactChecker
13th Apr 2024 17:23

Of course, whether the new tax code of K762X was actually correct will depend on a combination of what it was for which tax had been previously under-collected and whether HMRC got *those* figures correct.
But that's a different question to the one asked.

Thanks (3)
avatar
By Paul Crowley
13th Apr 2024 17:38

If client knows the gross, and client knows the net, then the p60 is predictable.
Most people on K codes are higher rate
Just do the figures to see if too much tax was deducted.

Thanks (0)
Replying to Paul Crowley:
avatar
By Not Anonymous
13th Apr 2024 17:57

Paul Crowley wrote:

If client knows the gross, and client knows the net, then the p60 is predictable.
Most people on K codes are higher rate
Just do the figures to see if too much tax was deducted.

You must have a different clientele profile!

I see plenty of cases where the K code is purely due to State Pension, no doubt with more to come with frozen PA and triple lock in place for the foreseeable future.

Thanks (1)
avatar
By songb1rd
13th Apr 2024 17:47

Many thanks to all respondents.

My mind is put to rest to enjoy a pleasant sunny evening:-)

Thanks (1)