Are you paying the right amount of income tax each year?
Paying too little tax is a huge problem, which will inevitably result in HM Revenue & Customs launching an investigation. But paying too much tax is a problem also.
According to a new Freedom of Information Request, submitted by insurer Royal London, around 460,000 people chased HMRC for refunds on their overpaid tax in the 2018/19 tax year. As a result, Royal London is urging taxpayers to double-check their payments, to find out if they have overpaid tax. Reasons for paying too much income tax include changing jobs in the year or changes to taxable benefits.
“Nearly half a million people tried to get overpaid income tax back from HMRC in the last tax year. This goes to show it’s a good idea not to assume the taxman is always right about what he says you owe. Always check your tax statement for the year and keep a note of any unusual changes to your income that might mean you have overpaid.”Becky O’Connor, personal finance specialist at Royal London, said:
One catalyst for overpayments is the tax paid on interest received as part of Payment Protection Insurance (PPI) compensation payouts. These PPI payments include annual interest at 8%, to compensate claimants for the years when they didn’t have the cash due to being mis-sold a PPI policy. If you’re a non-taxpayer, then this interest could fall within your personal tax allowance so that you could reclaim the tax paid on the interest.
For example, a PPI compensation payment of £3,000 in respect of a policy taken out five years ago would have resulted in around £180 paid in income tax directly to HMRC, which could be reclaimed. To check whether you’re eligible for an income tax refund in respect of a payout for PPI compensation, check the compensation statement and look for any tax paid on the interest part of the fund. If the interest was paid but not due – for example, because the interest element fell within your personal allowance for income tax, or you’re a non-taxpayer – then you could be entitled to request a refund.
To claim a refund on overpaid tax, you can complete form R40 on the HMRC website. It’s possible to reclaim overpaid tax for up to four previous tax years, in most circumstances. Other circumstances which can result in overpaid tax include pay from your current or previous job, pension payments, income from a life or pension annuity, a redundancy payment, a self-assessment tax return, interest from savings or PPI, or UK income if you live abroad.
According to Royal London, the total value of all types of repayments in the 2018/19 tax year was more than £7bn. With overpayments of this scale, it makes sense to check your circumstances to find out whether you have paid too much tax and could be eligible for a refund.
Jon Doyle is Founder and Financial Planner at Juniper Wealth Management. Advising clients since 2008 he has guided clients through good time, bad times and the ugly. With a clear vision on how advice should be delivered and strong opinions on how we should be investing money in order to live the life we want to live free from money worry.