Taxing times Print E-mail
Written by Jonquil Lowe, 2008   
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Tax office mistakes, forgetting to make a reclaim, missing the new deadline and wasting allowances are some of the reasons you could end up paying too much tax. Jonquil Lowe looks at how to hang on to more of your money

Income tax is the government's biggest earner, raising around £160 billion a year. For the UK's 32 million income tax payers, that means an average bill of around £5,000 each. But are you paying more than you should?

Tax errors

Over a million people pay the wrong amount of income tax each year because of tax office errors - most often being issued with the wrong tax code. The National Audit Office estimates that Revenue errors resulted in £157 million of overpaid tax in 2006-07.

You are most at risk if one or more of the following applies to you:

  • You are a pensioner;
  • You have several jobs;
  • You work through an agency;
  • You have several sources of income (such as earnings and investments);
  • You get benefits in kind through your job (e.g. a company car or free medical insurance).

Your PAYE code tells your employer or pension provider how much tax-free pay to give you before working out tax on what's left. If your code is wrong, so is your tax bill.

PAYE tax tips

  • Check your PAYE code each time it changes. Don't assume your tax office must be right.
  • If your circumstances change, ask for your code to be recalculated. In particular, from the start of the tax year in which you reach age 65, your tax allowance increases (to a maximum of £9,030 from £6,035 in the current tax year). Don't rely on the Revenue giving you the higher allowance automatically - write to your tax office to make sure your PAYE code is changed.
 

Tax reclaims

IFA Promotion estimates that Britons lose £322 million a year through failing to claim back tax e.g. on interest from bank and building society accounts.

Interest from most accounts is paid with 20 per cent tax automatically deducted. If you are a basic rate taxpayer, that exactly settles your tax bill, but if you are a non-taxpayer or starting rate taxpayer, you've paid too much.

Non-taxpayers can claim all of the tax back using Revenue form R40 (from your tax office or the Revenue website) or, even better, register to receive the interest without any tax deducted by completing form 85 available from the bank or building society. Starting rate taxpayers can claim back half the tax using form R40.

Tax reclaim tips

  • Bear in mind that when you reach age 65, your tax allowance usually increases, which may mean that you cease to be a basic-rate taxpayer and become newly eligible to claim back tax on interest.
  • Currently, you can go back nearly six years to reclaim tax overpaid in the past. Provided you claim by 31 January 2009, you can go back as far as the 2002-03 tax year.
  • From 6 April 2008-09, the 10 per cent starting rate band has been abolished for earned income (such as pensions and salary) but still applies to savings income provided your earned income is less than your personal allowance plus £2,320.

New tax return deadline

If you are one of nine million people who has to fill in a tax return, there are deadlines for sending it back, with an automatic penalty of £100 (or the amount of tax you owe if less) if you miss the deadline.

Around one in ten taxpayers do miss the deadline each year, unnecessarily giving the Revenue £84 million in fines.

You have the choice of either sending in the paper version of the return or filing online. In previous years, the only real deadline was 31 January following the end of the tax year.

There was an advantage in getting the paper return back by 30 September so that the Revenue would work out your tax bill for you, but no penalty if you missed that date.

From this year onwards, the rules have changed. To avoid a fine, the 2008 paper tax return (covering the 2007-08 tax year) must be returned by 31 October 2008, which is now also the deadline for the Revenue to work out your tax bill for you.

If you miss that date, you either incur the automatic penalty or will have to send in your return online.

The deadline for online filing is unchanged at 31 January. Whether you use the Revenue's free software or a commercial package, the computer program will automatically work out your tax bill.

New penalties

If there is a mistake on your tax return, you can be fined. The fine is set as a percentage of the tax you owe (on top of paying the tax and any late payment interest).

Under new rules, the amount of the fine depends on how the mistake arose and the degree to which you co-operate with the Revenue to put it right and pay the tax due (Table 1).

You can be fined even if the mistake was not yours. If a tax adviser or the Revenue itself makes the mistake, you are still expected to have made reasonable checks that their calculations are right and to take responsibility for any error.

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