Whenever I give someone a 'money makeover', I always pay particular attention to their tax affairs. That's because, after more than two decades of completing tax returns for myself and others, I know how easily mistakes are made.
What's more, these slip-ups can be hugely expensive. For example, one reader's financial affairs were perfectly documented. However, for six years in a row, he'd omitted to declare his pension contributions on his yearly SA100 tax returns. With my help, he received a £5,000 tax rebate, plus his tax bill fell by £1,000 a year. Not bad, eh?
Ten tips towards tax back
Therefore, it pays to keep a close eye on your dealings with HM Revenue & Customs (HMRC). Here are ten tips to help you to check your tax bills and claim a rebate if you've paid too much:
1. File your return on time
Each tax year ends on 5 April. Your online tax return, plus any tax due, must be sent to HMRC by 31 January of the following year. If you don't file on time, then you'll automatically be fined £100. A second £100 fine applies if you haven't filed and paid by 28 February. Further delays lead to really hefty penalties, so be sure to file on time!
Completing your SA100 is far easier if your paperwork is in order. The best thing to do is bung all of the relevant documents into a separate file for each tax year (this is 2009/2010). This file should include details of your earned and unearned income, savings interest, share dividends, etc.
Note that the law requires you to keep your tax records for six years, so don't throw anything away prematurely or you could be in trouble...
2. Check your pension contributions
Pension contributions attract tax relief, which either reduces your tax bill or boosts your pension fund. Therefore, it is vital that you properly report every pension payment to HMRC.
If your pension contributions are deducted through your employer's payroll, then you shouldn't have to worry. However, if you are self-employed or make extra contributions into a personal pension, then be sure to tell the taxman about these.
3. Check your charitable donations
The UK has one of the most generous tax regimes when it comes to making donations to good causes. The most popular way to be generous is by via Gift Aid, which boosts donations by a quarter (25%).
For example, if you donate £100 to a charity, then the charity gets your £100 plus £25 of Gift Aid. Higher-rate (40%) taxpayers can reclaim a tax rebate of a fifth (20%) of the total gift, which comes to £25 in this example. So, be sure to declare all your charitable donations to the taxman, including those made outside of Gift Aid.
4. Check your business expenses
Self-employed workers should record and claim all expenses incurred in their line of work. For example, you can reclaim the cost of tools or equipment needed to carry out your job, plus travel expenses for business trips, and so on.
In general, such expenses are reclaimable if they were incurred wholly or mainly during the course of business. Warning: don't behave like our MPs by trying to claim back the cost of duck houses, moat cleaning, or hedge cutting around your helipad!
5. Check your savings interest
Standard savings accounts deduct basic-rate (20%) tax at source. In other words, a fifth of your interest is automatically paid to the taxman and you get the rest. Higher-rate taxpayers have to hand over another 20% tax.
However, if your earnings are below the personal allowance (£6,475 in 2009/10), then you should not be paying tax on your interest. This often happens to pensioners and individuals on low incomes. To stop paying tax on savings interest, complete and submit a form R85 to your savings provider and reclaim any tax overpaid in previous years.
6. Check your tax-free income
There are various tax-freewrappers which allow savers and investors to shelter income and gains from the taxman. The most popular is the cash ISA, which pays tax-free savings interest that does not have to be declared to HMRC. There are 19 million ISA savers in the UK and a fair number will have mistakenly declared their ISA interest to the taxman. Don't make the same mistake!
(Sophisticated savers should also check the tax status of Venture Capital Trusts, Enterprise Investment Schemes, Real Estate Investment trustsetc.)
7. Check your tax code
An incorrect tax code is one of the most common problems leading to overpaid tax. Indeed, I reckon that up to half of all tax codes that I've seen are wrong. You can find out more about that by reading Claim £1,300 of your tax back.
The most likely thing to screw up your tax code is starting or moving work, as emergency tax is often taken from your wage. To prevent this, always hand over your P45 form as soon as you start a new job.
In my experience, tax codes can go awry thanks to company cars and other perks. This is a complicated area, so ask your personnel department to list your taxable employee benefits and how these will affect your tax code.
(A note for Welsh readers: some names are so popular in Wales that some Welsh taxpayers repeatedly get the wrong tax code. For example, how many men called Robert Jones are there in the Principality?)
8. Check your benefits
A large number of state benefits and one-off payments are not taxable, such as Child Benefit, various tax credits, and certain benefits paid to unemployed or disabled adults. Don't declare any of these on your tax return; there's a full list of non-taxable benefits at HMRC.
9. Check your capital gains
Capital Gains Tax (CGT) is a tax on the profits made from selling assets such as property (but not your main home), shares, and so on. This tax is levied at 18% of your gains, but everyone has an annual tax-free allowance (£10,100 in 2009/10), so very few people pay CGT.
What's more, you can reduce your current CGT bill by carrying forward losses from the previous six years. Hence, remember to take these prior losses into account when calculating recent gains. (There's a very good explanation of CGT on the DirectGov website.)
10. Check previous tax returns
If you've made mistakes in your latest tax return, then the chances are that you've made similar slip-ups in previous years. Therefore, do go back over your old tax returns to check for errors which could trigger a rebate. You can reclaim overpaid tax going back six years. If you hurry, you can go back as far as the 2003/04 tax year.
Finally, don't expect a tax rebate to land in your lap. It's up to you to make a claim and chase it. After all, it's your responsibility- and not HMRC's- to claim any overpaid tax. So, don't delay- claim back your tax today!
If you have a specific question about saving tax or boosting your savings, why not ask other readers for help via our excellent tool? If you're having trouble putting money aside, then create some spare cash by joining our Build up your savings goal.
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