The PAYE system should deduct approximately the right amount of tax from your salary so that you do not have further tax to pay on that income. However, it assumes that your income remains the same from year to year. This may not be the case.
Why might I have a ‘K’ code?
If you have a PAYE code including the letter K, this means your personal allowance has been reduced to zero and a notional amount of income has been added to your salary to be taxed. The imposition of a K code will result in a significant amount of tax being deducted from your salary.
You may have been allocated a K-code because you had an unusually high amount of non-salary income (eg dividends) in the last completed tax year.
Many company owners/directors took large dividends from their companies in 2021/22 as they knew that the dividend tax rate would increase by 1.25 percentage points on 6 April 2022.
HMRC will have assumed that the same pattern of dividend payments would continue into 2022/23 and coded this high level of dividend into the PAYE code, resulting in a K-code.
What to do
If you plan to take more modest dividends in this tax year to 5 April 2023, you need to tell HMRC about your expected dividend income. This is easily done through your online personal tax account under the PAYE heading. This alternation should remove the K-code.
Further information about tax codes can be found on the gov.uk website here.
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