Are you paying too much tax?
Hundreds of thousands of people may miss out on tax refunds if they are not careful. Six million new refunds were recently discovered by the Revenue during an annual check. Yet underpayments were also found meaning you may owe more. Here are ten things you need to know:
● A ten-second tax code guide
Tax codes have a critical impact on your finances as they tell employers how much tax to deduct. Take the most common 747L code. Add a five to the end of the numbers to discover what you can earn before income tax is taken.
In this case it is £7,475. Even small errors can lead to mistakes of £100s, so this really does matter. You will find your code listed on your 'coding notice', payslip or P45. Each income source will have different tax codes.
● Who is likely to be affected?
Only employees (full or part-time) and some with private pensions receive a tax code, as this is all about Pay-As-You-Earn deductions.
If you have more than one job or pension, have changed job recently, get employee benefits such as medical insurance, or have recently retired, you are the most likely to be affected.
● The new rebates are for the 2003-08 tax years
Her Majesty's Revenue and Customs (HMRC) is actually working backwards to spot the errors; last year it looked at 2008-10. There are six million rebates due but that doesn't mean it will go to six million people as one person could be entitled to a few from distant years. Refunds average £300 per person and include 0.5 per cent interest, and cheques are due between now and December.
● Free tax code calculator
To avoid waiting check whether your tax code is correct now. To help you can use my free tool at www.taxcodechecker.com. Just tap in your details and it will inform you whether you may have over or underpaid in any year, and explains how to reclaim.
● If your address is wrong, you will miss the rebate
Rebates are posted to your registered address. Unfortunately, many who have moved assume employers update it. As a result hundreds of thousands of people risk missing a rebate or the demand to pay up. So ensure HMRC have your correct address.
● This could be big money
Since 2010 we have been drenched with tax rebate success stories due to tax code errors. The biggest being £5,000, for someone who found he had been deducted for a company car and medical insurance that he didn't have.
● 1.2 million will be told to pay up
This is the other side of the coin. The underpayments that have been found are for the 2010/11 tax year and are typically around £600. It will usually be deducted gradually from next tax year's pay packet, though some pensioners get three years to pay. Those who owe over £3,000 will be asked for a lump sum back.
● Time for a new strategy
Last year I wrote about the Extra Statutory Concession A19 that helped some escape payment where the taxman made errors and took over a year to inform you. It may still work for older cases but not new ones as these errors are too recent for the 'over a year' bit to take effect. Although HMRC will write off demands under £50.
● Do not believe the spam
HMRC never emails you to tell you about a rebate. Sadly whenever news of an error breaks, the fraudsters use it as an opportunity to call or email, claiming to be from HMRC and offering a rebate. They are really after your bank details.
● If in doubt contact HMRC
If you think your code may be wrong, the answer is to contact HMRC. The phone number is 0845 300 0627.
● A final simple warning
When you receive the letter telling you what your tax code is, turn it around. On the back there should be a description of why it is what it is. It is worth spending a few minutes going through it to prevent any future potential problems. After all, while a rebate is nice, it is even better to have the cash stay in your pocket.