So, how can you check easily if you may have overpaid income tax without knowing it? Here are a few useful tips
First, it is important to have a minimal understanding of personal allowances and tax codes. HMRC can only assess if you have paid the correct amount of tax or not once the tax year has ended. This way, they can total up what you’ve earned in the year with the amount of income tax you paid in that period. Under PAYE (the ‘Pay As You Earn’ tax system for employees, designed to deduct income tax at source) tax payers are entitled to receive a personal allowance. It is the tax free amount that anyone in the UK is entitled to earn without having to pay any income tax, within a tax year. The personal allowance rates change nearly every year. They are reflected in the coding notice (‘tax code’) that HMRC communicates to employers so their payroll department deducts the correct amount of income tax from the employees’ wages (amounts which they then forward to HMRC). The rates of personal allowance and the relevant tax codes since 2009 are:
A ‘BR’ tax code means that HMRC will charge the ‘Basic Rate’ of income tax on earnings, currently set at 20%. This means that HMRC will not apply any personal allowance against that employment. It is normal that a BR tax code is applied to a second job you may hold, as the personal allowance is only allocated against your main job. This means that if you have 2 separate employments (you work 2 jobs at the same time), your second job should normally have a BR tax code against it.
Sometimes, a BR tax code is allocated against your main job. This usually happens in the period following someone starting new employment, when HMRC is reviewing the employee’s tax position and before they communicate the correct tax code to the employer’s payroll department. Any overpayment of tax is normally refunded automatically by HMRC through the employee’s wages. So, if you just started a job and you are on a ‘BR’ tax code, there isn’t much to worry about, you should normally be refunded the tax you’ve overpaid, usually within a few weeks or a couple of months. This is called a ‘tax refund’ (or ‘tax rebate’). Many tax payers receive automatic refunds that way.
However, in some cases, the situation doesn’t get resolved and the BR tax code remains – all of your income is charged at the 20% rate from that point on, without you receiving any portion of your tax-free personal allowance. So, why is that? This generally indicates that HMRC is unclear as to your precise income in a particular tax year. So, because they are not clear on your precise earnings or any personal allowance in that year, they decide to charge you at the 20% rate, just to make sure that you don’t underpay tax. It doesn’t really matter to the taxman if you end up overpaying tax as a result, ultimately all he’s interested in is that you pay tax every time you earn!
HMRC’s view is that it is down to the individual to prove that they have paid too much income tax… and they won’t apply the correct amount of personal allowance unless they are 100% clear on the income you earned in that tax year. Some taxpayers end up overpaying hundreds or even thousands of pounds over the years, without necessarily realising it! According to HMRC’s own statistics, 1 in 3 taxpayers could be paying too much tax.
The reason for HMRC not being clear on one’s income can be varied. This can happen especially if you failed to give a new employer the P45 from your previous job (or Benefit centre if you claimed Job Seeker Allowance or Employment Support Allowance). Maybe a former employer didn’t communicate to HMRC your precise income figures (which they should have done by law). Maybe the actual employer went bust and didn’t keep records of their employees’ deductions. Another likely reason is if HMRC realise that at some point you made an application for JSA/ESA and they don’t know how much benefits you may actually have claimed. Because JSA/ESA are taxable benefits, they count as income received towards your tax-free personal allowance. So unless HMRC are certain of the amounts of benefits you may have received, they will not be able to calculate your personal allowance. This is why enlisting the help of an experienced tax agent like TaxRefundPro could be so beneficial as we have the expertise in unblocking these particular situations and get our clients’ money back where it belongs… in their pocket!
People who are the most likely to fall in that scenario are:
- Workers who have worked for multiple employment or temporary agencies as many employment agencies fail to give them a P45 when they ‘come off their books’ (because they found employment elsewhere or went back to claiming benefits)
- People who had multiple employments in the last 5 years, going in and out of periods of claiming JSA/ESA If this sounds like your situation, then don’t delay and get in touch so we can advise you further on how to claim back your overpaid tax, with no obligation to use our services. You may not have all the necessary P45 and P60 documents to work out what your income has been in the last few years but don’t worry, we can help you bridge the gaps if you decide that you wish to make a claim with us.
If however, you enjoyed a stable employment history (say, you have been with the same employer for at least 2 years), then the chances are you would have paid the correct amount of tax and therefore you would not be due a refund. Your employer & HMRC would have applied the correct coding notice (which for most people is 810L for the 2012-2013 tax year and 944L for the 2013-2014). If in doubt, you can easily check this by using our tax calculator.
