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Most people will have fairly straight forward tax affairs, with one employment throughout the year and the correct amount of tax deducted by the employer each week or month. At the end of the year, the tax paid will be correct and no further action is required. However, some people have tax affairs which aren’t as straight forward and could end up paying either too much or too little tax at the year end. If a person has paid too much tax, they can apply for a tax rebate, which is when the overpaid tax is given back to them, possibly with interest. If a person hasn’t paid enough tax during the year, this will usually be collected through the next year’s tax code, although this isn’t possible in all cases.

Very simply, each person is given allowances each year which is the amount which can be earned without paying tax. Deduct this amount from the total amount of taxable income received during the year and you will be left with the amount which is taxable. If you are a basic rate taxpayer, you will pay 20 per cent tax on this amount. It becomes more complicated to calculate tax due if you receive age allowances or are a higher rate earner.

There are many scenarios which may result in too much tax being paid. If you have commenced new employment, your new employer may have operated the emergency tax code, which results in the correct amount of allowances being given each week but not the cumulative amount. Your new employer may even be operating an incorrect tax code which would result in the wrong amount of tax being paid. If you are a student with a part time job and you haven’t completed a form P38S, you won’t benefit from the full year’s personal allowances and may pay too much tax. Any change in your circumstances during the tax year, such as changing from full time to part time employment, retiring part way through the year or becoming self-employed during the year, could all affect the tax you have paid.

HM Revenue & Customs will issue the correct tax code to your employer or pension provider so that the correct amount of tax is deducted each time you are paid. You will receive a Notice of Coding informing you of your tax code. Your employer or pension provider will also be sent a copy of your tax code so that they know how many tax free allowances you are entitled to and how much tax to deduct. If you have more than one employment or an occupational pension and employments, you will have a tax code for each employment or pension. Your main pension or employment should have all the personal allowances allocated against it so that you receive your tax free amount against that income. If you have more allowances than income, the excess allowances will be allocated to one of your other employments or pension. Any employments or pension which doesn’t have any allowances allocated will be charged at the appropriate tax rate on all the income. For a basic rate taxpayer, the tax will be charged at 20 per cent, while a higher rate tax payer could pay 40 per cent on some of their income.

There are a number of ways to reclaim overpaid tax, either through wages or at the end of the tax year from HMRC. It is crucial to check your tax codes each year to ensure that you are paying the right amount of tax. If you are unsure, obtain professional advice immediately.

 

 

About The Author

Kara Copple

An experienced business and finance writer, sometimes moonlighting as a fiction writer and blogger.

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