What is a Tax Refund? Your Income Tax Refund guide

A very common type of tax refund comes in the form of a PAYE tax refund.

Being employed means you will pay income tax on your earnings at different rates of income tax through the pay as you earn system.

If you have paid too much income tax for any of the last four tax years, you can claim what you have overpaid through PAYE as an income tax refund.

You can also be due refund of income tax if you complete a self assessment tax return.

Tax refunds explained

A tax refund is calculated and payable by the tax office and in many cases will not be refunded unless a formal claim is made.

Income tax refunds are calculated based on how much tax you owe HMRC from all of your sources of income which can include income from a pension or a rental property.

When finding out if you are due a tax refund you should take into consideration your whole tax position and the many things that can affect how much income tax you should pay.

If you don’t it’s easy to overpay tax now, continue to overpay in the future and miss out on any refund from the past four tax years.

Why would I be due a refund of income tax?

There are many reasons why you could be due a tax refund under PAYE and in a lot of cases people are simply unaware what they can claim a refund for.

One area where many taxpayers miss out on what they are owed is focused on the cost of expenses incurred to perform their job.

HMRC calls these work related costs expenses of employment.

Some of the common reasons why you may overpay income tax are:

  • Travel – Any required travel as part of your role (but excluding the commute).
  • Uniform – Washing, dry cleaning or any other necessities related to clothing maintenance.
  • Tools and protective clothing – When you must pay for items out of your own pocket.
  • Professional fees – When membership of professional bodies or Trade Unions are needed.
  • Leaving the UK – If you are due to leave the country, you may be entitled to a rebate.
  • Pension tax relief – As a higher rate taxpayer paying into a private pension, you can get an extra 20% tax relief.
  • Working from home – If you are contracted to work from home, you are able to claim proportionately for costs such as energy and phone/internet bills.
  • Married persons allowance for couples who are married or in a civil partnership.

What tax rates apply to my income?

The rate at which you pay tax on your income depends on the level of your overall taxable earnings.

Everyone is given a tax free personal allowance which means you don’t have to pay income tax up to the personal allowance threshold.

After the free personal allowance the tax rates are set at 20%, 40% and 45%. The rate at which you pay income tax depends on the tax band your income falls into.

The basic rate tax band is set at 20%, higher rate tax band at 40% and the additional rate tax band at 45%.

Income tax rates and bands are different in Scotland for Scottish taxpayers.

Understanding which tax rates apply to your income is valuable when working out if you are due a tax refund and for making any personal financial budgets.

Tax codes and tax refunds

Don’t ignore your tax code because you could pay too much tax if it’s wrong. The tax office will give you a new tax code often each tax year and if you get any benefits from your employer like a company car or health scheme.

Your tax code can be wrong and if it is you will not pay the right amount of income tax. For this reason checking your tax code regularly can help avoid paying too much income tax.

You can locate your tax code in a number of ways including a recent payslip, HMRC app or your personal tax account.

HMRC will never normally accept responsibility for an inaccurate code. The onus is on you to check the accuracy of your code and to get it changed if it’s wrong.

How do I claim an Income tax refund from HMRC?

The way in which you claim back a tax refund depends on the tax year and reason why you overpaid income tax.

Below we breakdown the best way to claim for some of the more common income tax refunds:

Employment expenses worth under £2500 in any one tax year for costs like tools, uniform washing and work related travel need to be submitted by completing an online or offline form P87. The P87 is the form HMRC needs so they can review your employment expenses claim.

Employment expenses worth £2500 or more in any one tax year should be submitted on a self assessment tax return. If you are not already registered for self assessment a P87 detailing your employment expenses will normally be needed by HMRC and then they will open a self assessment tax return for you.

Inaccurate tax code: You should report a tax code discrepancy to HMRC as quickly as you can by calling 0300 200 3300 or online which is often a quicker process. Your tax code can be reviewed and updated where necessary and your income source sent a new code to use from when you are next paid.

Income tax refund P800 tax calculation

A P800 tax calculation will be sent to you automatically from HMRC when you have overpaid income tax.

You will be sent a separate P800 for each tax year with the calculation detailing the figures used to determine the value of your tax refund.

You can claim back your tax refund by BACS via your personal tax account, HMRC app or by cheque if you would prefer.

You should check your P800 carefully to make sure the figures accurately reflect your tax position and if they don’t you should tell HMRC by calling the phone number on the P800.

Is all of my income taxable?

Not all income is taxable and if you are not aware of what qualifies as tax-free income, you might miss out on significant tax saving opportunities.

HMRC allows some individuals to claim tax relief and use tax-free allowances to decrease their taxable income and potentially decrease their overall total tax bill.

Some tax free allowances and tax reliefs are granted automatically by HMRC but others are not meaning that you have to claim them to receive the benefit.

Our guide to tax relief highlights many of the most common options available to workers under PAYE.

Income tax refund facts

  • If you don’t make a tax refund claim in many cases you won’t receive the income tax refund you are entitled to.
  • Check your tax code – if it’s it wrong you won’t be paying the right amount of tax.
  • Find out what you can claim a tax refund for. A lot of people wrongly assume they are paying the right amount of tax under PAYE and do not claim back tax relief on expenses they incur because of their job.
  • Make a claim as soon as you can so you don’t miss out. A tax refund claim can be made for the previous four tax years only.
  • Be aware of tax refund scams. Fraudsters target UK taxpayers by email and text so it’s important to stay alert and make sure you are only dealing with HMRC directly.

Tax free personal allowances

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