How to reclaim overpaid tax from the Revenue if you are on a low income

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The Independent Online
I doubt anyone wants to pay more tax than they have to. The truth is many do pay more than they really should. Estimates of this additional contribution to government coffers are as high as pounds 5bn - how can you avoid being part of this unnecessary largesse?

Those in employment can do a lot by checking their tax code. That was the subject of one of these columns some months ago. But today I want to try to help those who can afford unnecessary tax even less - the unemployed and the elderly.

As always, much of the problem comes with the complexities of our wonderful tax system. But half-an-hour's study could bring some useful money back to you.

The key thing to remember is that everyone gets a personal allowance - currently pounds 4,045 for this tax year. That's the amount of income you can have before tax starts to bite. That allowance is available to every man, woman and child: so, first thought - what about claiming the tax back on that dividend little Willie gets on the shares Grandad left him?

Those of more senior years get a bigger allowance. Anyone over 65 at any time during the tax year gets a personal allowance of pounds 5,220 instead of pounds 4,045; those aged 75 or over get pounds 5,400. Just to be difficult, these higher amounts are reduced if you have taxable income above a certain level, currently pounds l5,600. Achieve more than this (probably through a combination of pensions and investment income) and the higher allowance reduces by pounds l for every pounds 2 of income above the pounds l5,600 figure. However, any reduction won't take the allowance below the pounds 4,045 figure.

So - if you are retired, sit down and have a think about your income. Don't forget the state pension - that is taxable. Add up the pension(s) you get, include the investment income (dividends, interest income and the like) using the certificates that companies, banks etc send and do use the gross figures (of cash plus tax credits). Now - you've got a total figure, so deduct the personal allowance.

Tax is at 20 per cent on the first pounds 4,100 of what is left, after which the 23 per cent rate comes into play. Compare the tax due with what you have already lost through deduction at source and you may find you've overpaid. A rough and ready route would be to compare your pension(s) with the personal allowance - if they don't use up the personal allowance, then some of the tax on dividends and interest may be due to be repaid.

The unemployed have a similar route to follow. Substitute unemployment benefit (or the new Jobseekers' Allowance) for pension - both are taxable. The sums get more involved if you have had some earnings for the year: you need to include those earnings in your calculations, and take account of the tax you lost on them through Paye. All that will be on the P45 you were given when you left your employer.

Of course, many students are also affected, particularly if they had a job during a placement year. Their earnings for that job would probably be taxed as normal - as indeed would earnings for a summer job - so there may be tax to reclaim.

By now I've probably got a number of readers scribbling sums down on bits of paper and reaching for a calculator. What's the next step if you think you are overpaying?

If you are one of the lucky(?) 8 million who have a tax return, completing that will set the reclaim ball rolling. If you've escaped a tax return contact your helpful local tax office and say that you think you are due a tax repayment. Mention Form R40, the simple form that is key for non- or low-taxpayers.

You can also help yourself for the future. If you are a non-taxpayer, you can register to get building society interest without any tax deducted. There is (as always) a form to complete, available from your bank or building society. Remember to do the same with little Willie's bank deposit too - if you explain to him what you are doing you may well be sowing a seed that will turn him into a financial adviser to help you in your old age. Mind you, as my mother would no doubt say, that can be a mixed blessing.

John Whiting is a tax partner at Price Waterhouse

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