Our tax pays for the public services that we all use, so most of us don’t see it as a problem that we have to pay it. However, a high tax bill can put a serious dent in one’s income and when it comes to tax refunds, not all of us know if we are entitled to one or what we’re entitled to.
Let’s delve into some of the factors that can influence how much we pay and if we may be able to receive a refund.
Your tax code
An incorrect tax code is possibly the most common cause for overpaid tax (if you are employed). This can happen for several reasons such as information not getting updated at the tax office, your employer making a mistake on a PAYE return or simply accepting that you must be one of the lucky people that pays a lot of tax and not questioning it.
The number on your tax code, when multiplied by ten (give or take £5), is the amount of money you can earn before you pay tax. This is known as your ‘personal allowance’. The letters mean various things:
L – you are entitled to the basic personal allowance (currently £8,105 for the 2012/13 tax year)
P – You are aged between 65-75 and eligible for full personal allowance (£10,500)
Y – Over 75 years old and eligible for full personal allowance (£10, 660)
T – The HMRC believes there are other items that need to be considered when calculating tax
NT – No tax is to be taken
BR – ‘Basic rate’, which is at 20%
D0 – You income is tax at a higher rate, around 40%
If you think that your tax code is wrong you can get in touch with HMRC on 0845 300 0627 (I got the number from here: http://search2.hmrc.gov.uk/kb5/hmrc/contactus/view.page?record=hpkspulskxM
Check your previous Tax Returns
If you are self employed or have additional income to your usual job you should be submitting a Tax Return every year. This provides HMRC with details of your income and your expenses. The simple way to work out how much tax you pay is to subtract the expenses and then your ‘personal allowance’ from your income and you pay tax on the rest (profit!).
If you haven’t entered all of your expenses then the profit will be higher and so will your tax bill. It’s best to get advice from a good accountant about this or you could be paying too much tax and you (or a bad accountant) could have been making the same mistakes for years.
Go back through your previous tax returns. You can amend the figures and claim for a refund from up to four years ago.
You can’t just make up more expenses; you need to have the proof and as you’re supposed to keep everything for 6 years anyway that shouldn’t be too much trouble should it?
The important thing to note is you can only use expenses that have occurred in your direct line of work.
To make the process simple there are (as one would expect) companies that specialise in helping people obtain tax refunds. One such is RIFT who started in 1999 and to date have helped claim back over £30 million!
Make an effort not to declare tax free income
There are a few savings and investment products that can be utilised to ensure your savings aren’t hit by tax. The most well known of these is the ISA which, offers you tax free interest on your savings. Don’t declare the interest as income from these types of savings to the HMRC. It’s not evading tax – these savings are tax free for a reason!
If you’re not sure about that it actually confirms as much on the HMRC website.
The specific wording is: You do not have to declare income and capital gains from ISA savings and investments or even tell your tax office that you have an ISA.
Are you saying ‘Doh!’ about now?
If you are then decide if you need to seek professional help (for your tax). If you are paying too much tax because of a mistake in your self-assessment form it may take a keen eye to spot it and may require an audit by a bookkeeper but once you get it right you will get the tax back that you didn’t need to pay.
Look into everything you earn and what you spend to make sure that you’re paying the correct amount of tax.
Keep every receipt! In fact, keep everything! Let your bookkeeper sort it out! That’s what good ones do!
Any information shared on UKMoneyPot does not constitute financial advice. The Website is intended to provide general information only and does not attempt to give you advice that relates to your specific circumstances. You are advised to discuss your specific requirements with an independent financial adviser.