3.5m taxpayers to get a rebate - are you one of them?

The taxman is sending out letters this week to taxpayers. Will you be getting a rebate or a demand for more money?

Over five million people will find out if they have under or overpaid tax as letters start landing on doormats this week.

The majority of you receiving a P800 tax calculation – up to 3.5 million taxpayers – are in line for a tax rebate, with an average repayment of £379.

But an unlucky 1.6 million people will owe an average of £537 to HM Revenue & Customs (HMRC).

This annual process is starting two months earlier than last year, using the Pay As You Earn (PAYE) system for the tax year 2011/12, and should be completed by October.

Why would anything be wrong?

At the end of every tax year, employers and pension providers send details of your salary, pension and tax paid to HMRC.

The information is used to check that you’ve paid enough tax, which most people will have done. However, it’s not always going to be 100% accurate, especially if you take on extra work through a different company or if you change or lose your job.

Errors can also occur if you’re self-employed or if you fill out your own tax return each year. In some cases HMRC could have made a mistake.

HMRC has recently started piloting a new way of getting this information, which it believes will completely eradicate all errors. Time will tell.

Wish for a rebate

If you have overpaid, the drinks are on you.

A repayment will be made automatically and there’s no need for you to make a claim. Confusingly, you might receive payment for another year when you overpaid tax, with two calculations laid out together on one form. If you’re owed rebates for more than two years, you might receive more than one envelope. But, you will get the whole caboodle in one cheque.

Uh-oh, you’ve underpaid

It’s not pleasant news but don’t worry – you don’t have to pay it all off in one go. Any sum owed is taken automatically in instalments over the course of this tax year. This is done via an alteration to your tax code.

However, you can opt to pay it all immediately if you like. In which case you should call the number on your letter and ask for a payslip.

In the unlikely event of your bill amounting to £3,000 or more, the balance is due within one month or by 31 January following the end of the tax year you underpaid – whichever is later. HMRC can sometimes arrange for you to repay through the Self-Assessment system.

If you would rather repay over the year, you can pay a lump sum to bring your balance below the £3,000 threshold and the rest will be deducted via your tax code. Details of who to contact should be in your letter.

Can’t afford the repayment?

Fortunately, HMRC isn’t a loan shark, so you won’t lose limbs if you can’t afford to repay what you owe.

But, they will require an explanation, so if you’re struggling you need to call the number on your letter and tall them why. You might also have to provide rough estimates for your income, spending and savings. If the figures stack up you can spread the payments out over more than one year.

Taxpayers can contact HMRC on 0845 3000 627 if they need to discuss a repayment plan.

Challenging the tax bill

It’s possible to appeal a tax bill if you made every effort to ensure your affairs were in order in the years gone by. Some taxpayers have used the memorably named Extra Statutory Concession (ESC) A19 rule to overturn their bills and have been successful. 

More information can be found on the Low Incomes Tax Reform Group website.

Checking your tax code

Always double check your tax code, and that the figures match your own records.

A spokesman at HMRC warned that you should check your tax coding notices as if they were £1,000 notes. Don’t assume all is OK – or even that HMRC is always right – by leaving your form to fester under a pile of other household admin.

You can get on top of what your tax code should look like by reading How to make sure you’re on the right tax code.

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Why all taxes must rise by 16%!

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Ten ways to avoid Capital Gains Tax