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Tax Overpayment

At least one million people on PAYE overpay tax annually, many of whom never claim it back, so why are so many people happy to sit back and let the government take our money?

The UK’s two-tier taxation policy is costing the country’s poorest dearly – at least one million people are an average £450 a year worse off as a result of overpaid tax. Indeed those most vulnerable individuals – the lower paid and temporary workers often people working on Emergency Tax Codes before heading abroad – are losing out every year since the Revenue’s introduction of a policy that shifts the onus for claiming tax rebates onto the individual, a shift that many people are unaware of.

Since the inception of Self Assessment in the 1996/1997 financial year some nine million UK citizens – the majority of whom are higher rate tax payers with pensions, savings and property – have undertaken the annual process that places the burden on the individual to reveal relevant information and manage taxation. However, for the country’s 22 million people who are not Self Assessed a subtle shift towards personal responsibility has gone unannounced and unnoticed. Until 2001, the Inland Revenue contacted people it believed had overpaid tax during the previous year, including those that had benefited from a full year’s personal allowance as a result of job change, incorrect tax codes, maternity leave or entering full time further education.

Yet it has become apparent over the last three years that the Revenue has changed its policy: overpayment is not highlighted as a matter of course. If overpayment has occurred, the onus is upon the individual to make a claim to the Revenue. Given the British public’s notorious reluctance to contact the Revenue direct, and a fear that any rebate could be swallowed up by expensive tax advisor or accountant fees, the majority of this money is left unclaimed, adding an estimated £500 million to the government’s coffers annually.

How has this situation come about? It is not due to any deliberate policy shift from the Revenue, no matter what the majority of begrudging taxpayers would like to think, but is rather the result of dwindling resources in a time of increased pressures. Local offices, which used to send out reminder letters to people who were owed tax, now have to contend with the burgeoning pressure from government policies which make them deal with Child Tax Credit, Pensions Credit and National Insurance. In short they are swamped and have no time to hold individual people’s hands by sending out reminder letters. The onus has switched and it is very much down to the individual to claim back their own rebate – or risk it being forever swallowed up by The Government.

According to a source at the Inland Revenue, between 5 and 10 percent of the population is subject to an emergency tax code at the end of the year. This means that tax is paid throughout the year on the basis of a weekly proportion of the annual personal allowance. Therefore anyone failing to work the full 52 weeks is entitled to a tax rebate.

Those most at risk from this situation are primarily people with temporary or transient employment, such as people in the hotel/restaurant trade or merchant seamen. People going abroad and doing part-time work beforehand and students working prior to embarking upon a gap year will also be likely to overpay.

A further 5 to 10 percent will not have completed a full year’s employment as a result of moving abroad, being made redundant or having a baby and have therefore not claimed the full personal allowance entitlement simply because they were ‘not working’ on 5 April. Any individual whose working circumstances have changed, affecting allowances for healthcare and a company car are also likely to be overpaying tax if they have not immediately informed the Revenue.

So why are so many people failing to reclaim this tax overpayment? Firstly, many remember receiving letters from the Revenue in the past and mistakenly believe this system still operates. Secondly, it is widely perceived that employers handle the individual’s tax matters — unless under Self Assessment of course.

But times have changed and the era of personal responsibility is upon us. While those on Self Assessment are regularly reminded that failure to submit will result in a fine, the shift within the PAYE world has not been admitted, let alone publicised. The individual is now responsible for contacting the Inland Revenue to obtain their refund.

Yet, even if there is a belief that tax may be overpaid, few UK citizens are keen to approach the Inland Revenue, for fear that any approach could lead to a personal investigation. Even fewer would consider the costly business of employing an accountant or tax advisor to reclaim what may be a small sum.

Online services have taken up the mantle for the common man, meaning the individual does not have to employ an expensive accountant, making it possible to ascertain whether a tax rebate is due – not only for the last year but for the previous six years. Such services will calculate what is due and either reclaim the money or provide a letter instantly, for the taxpayer to send to the Revenue. Unfortunately, true to form, once the process is in place, the Revenue will take somewhat longer to respond and provide the rebate – often as much as five weeks!

In order to be able to claim their rebate taxpayers require their P45 or P60 provided by their last employer. With this information, the system can automatically calculate how much refund is due and either provide a prepared letter or the data can be sent to a tax advisor who will deal with the claim, often charging on a ‘no-win – no-fee’ basis. Throughout this process an individual does not have to contact the Revenue once – a key consideration for a tax fearing nation.

While such systems are invaluable in enabling people to reclaim overpaid tax, the shifting onus to the individual is a wider issue that simply must be addressed. If the government is to require even those on PAYE to undertake an annual taxation check why not move the entire population onto Self Assessment? This system is used in the US and other European countries. Those with little income are offered a simple, short form and only those with more complex issues – such as healthcare or pensions – are required to complete a more detailed form. Indeed, the Revenue has completed a trial of this short form – but only for those already on Self Assessment. It pays no account to those on PAYE unaware that they will not be reminded again this year to submit their refund application.

The system that is in place today is not working. Many needy UK citizens are regularly losing around £450 a year to The Government because the Revenue is ill-equipped to handle all that is being asked of it. At present millions of pounds are lying unclaimed in government coffers that the average person is either completely unaware or too scared to claim. Isn’t it time we started claiming back what is owed to us?

Anthony D’Alton, Tax Checker

Please note: This guide is intended to provide basic information only. Where specific advice is required, we recommend that you seek proper professional help; either from TaxChecker or other suitably qualified person or practice.

by Anthony D’Alton

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