Are you paying too much tax?

justin schamotta
By Justin Schamotta

tax refund©

LIKE the bogeyman, the tax man inspires both dread and confusion.

The various forms of taxation he wields seem like as random and unstoppable as weather and just as capable of making us glum.

But tax, as they say, doesn't have to be taxing.

In the four instances below, at least, we show how to cut through the jargon and make large savings on tax bills fairly easily.

1. Check your tax code

Which code now?

A tax code is used by employers and pension providers to work out how much tax to deduct from wages or pensions.

It is identifiable as several numbers followed by a letter.

The numbers, if multiplied by 10, show the total amount of income a person can earn from that source - job, pension, and so on - before paying tax.

The letter shows how that figure should be adjusted.

For example, numbers followed by the letter "L" are the most common form of code. This is extreme shorthand for "standard personal allowance" - which for anyone under 65 is £10,600 in the 2015/16 tax year.

Numbers followed by "BR" mean the whole of that income should be taxed at 20% - often found on the payslips of people with second jobs, for income from a pension on top of income from a job, or used as an emergency tax code for people who have recently changed jobs or significantly increased their earnings.

Emergency tax is one prime example of how people end up paying the wrong amount of tax: sometimes HM Revenue & Customs (HMRC) just can't work out what's going on with the payslip and so, erring on the side of caution, they tax pretty high.

People who have "BR" in their tax code - as mentioned, those with more than one job, or pension earnings as well - are more likely than most to face tax code problems.

HMRC assign a "main" tax code and as many additional codes as a person has jobs or pensions. As a result, sometimes people end up getting taxed on money that should be safely within their personal allowance.

Check it!

To ensure that they don't pay too much tax, all employees should check their tax code every year.

The easiest way is to use HMRC's tax checker - there's plenty of detailed information about what information is required, and how it works, on that page.

Those with the wrong code should contact HMRC straight away to have it corrected.

At the end of the tax year, those who have been taxed too much can claim a refund by contacting HMRC.

A phone call is a good way to kick of the process or just get some help. The number is 0300 200 3300; office hours are 8am - 8pm Monday to Friday, and 8am - 4pm on Saturdays.

Alternatively, there's an online form available here.

Bonus: check national insurance

Similarly, there's a limit to how much people must pay every tax year in National Insurance contributions.

Anyone who is employed and self-employed at the same time, for example, or has continued to pay contributions after becoming eligible for a state pension, may have overpaid.

Again, those who have overpaid are entitled to contact HMRC for a refund - and again, there's an online form through which to apply.

2. Check your council tax band

I always wanted to be in a band...

Council tax bands are groups running from A to H, where A determines the amount paid by the lowest value properties.

In England and Scotland, that refers to those properties that were worth less than £40,000 in 1991, when the valuations were originally made.

Obviously, property prices vary by region, but a house worth between £100,000 and £150,000 now is likely to have under £40,000 in 1991.

As many homes were originally valued by no more than a cursory glance, a large number are in the wrong council tax band.

While some are in a lower band than they should be, far more are in higher bands, and their owners can be paying a good few hundred pounds too much council tax each year.

Those who find they've been assigned the wrong band can claim a refund backdated for as long as they've owned the property, or to 1993, whichever is most recent.

People in Wales should note that the council tax bands there are based on valuations made in 2003, and the thresholds between bands are different as a result.

Check it!

Checking which council tax band your property is in couldn't be easier. The following postcode search tool shows the bands of every house in England, Wales, and Scotland:

We could expect neighbours whose property is a similar size to our own to be in the same band as us. If one is higher than the other, it's likely someone may be paying too much, although bear in mind that it might not be the household in the higher council tax band.

As well as comparing with the neighbours, then, it's worth working out whether the last valuation was fair.

If the area has changed significantly in some way that has caused house prices to drop since the valuations were carried out, that's worth taking into account.

Property sites like Zoopla can help with this.

Once they're fairly sure their property is in the wrong band, homeowners can ask for a reassessment by contacting the Value Office Agency.

But do bear in mind that estimating accurately is important, because the agency can put bands up as well as down. More information is available via Directgov here.

3. Look for discounts

Council tax discounts

Full time students don't pay council tax: living alone or in a shared house if students are paying, they're paying too much.

The single person discount reduces council tax bills by 25%, while people with a low income can also save by applying for council tax benefit.

Tax credits

Households with children or a relatively low income may be entitled to either child tax credit or working tax credit.

It's estimated that every year at least £5 billion of means tested tax credits goes unclaimed.

Eligibility depends on a number of factors: the more people earn, the fewer tax credits they are likely to get; conversely, the more children people have, the more tax credits they are likely to get.

The number of hours worked is also considered, as are any disabilities.

Claims for tax credits can be made at any time of the year; first claims can be backdated for up to a month.

For more information contact the Tax Credit Helpline on 0345 300 3900 (8am to 8pm, Monday to Friday, 8am to 4pm Saturday), or try HMRC's tax credit calculator.

4. Need a new car? Think tax

Finally, reduce the cost of car tax by opting for a car with low emissions.

Of the 13 bands for Vehicle Excise Duty, the most polluting cars are charged the most, while those that emit less than 150g of carbon dioxide per kilometre pay a reduced standard rate.

For even greater savings, forgo the car altogether and get a bike.

Employees on PAYE can save at least 25%, and usually around 50%, of the cost of a new two wheeler by getting their employer to sign up to Cycle Scheme.

Under the scheme, the employer buys the bike on a tax-free basis, and deducts the cost through the employee's wages, usually over a 12-month period.

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