January 14, 2011 6:14 pm

Savers urged to check tax code deductions

by Steve Lodge

Thousands of higher-rate taxpayers who have been excused from filing tax returns could be paying hundreds of pounds of unnecessary tax following the steep fall in interest rates in recent years.

Experts warn that people who have received letters from HM Revenue &
Customs (HMRC) telling them they no longer need to fill in returns should still consider whether they could make a reclaim for overpaid tax.

HMRC says it routinely writes to higher-rate taxpayers with “straightforward” finances – typically employees with some savings and investment income – telling them that unpaid tax will be collected by reducing their pay-as-you-earn (PAYE) code – effectively by clawing back some of their personal allowance.

But code deductions for the higher-rate tax due on savings income could be too high because they are based on interest previously received, say experts.

Savings rates fell heavily as the base rate dropped to its 0.5 per cent low in March 2009, and many people could have seen their interest income halve in the subsequent 2009-2010 tax year. Interest income could also have dropped as people dipped in to
their savings capital in the downturn.

John Whiting, policy director at the Chartered Institute of Taxation, said: “This could affect quite a lot of people, even if the individual sums may not be big.”

And with taxpayers potentially able to claim refunds of overpayments going back six years – to 2004-2005 – the total repayments could add up.

Mike Warburton of accountants Grant Thornton said he had also seen examples of codes failing to give higher-rate tax relief for pension contributions.

HMRC has come under fire in recent months for issuing millions of incorrect PAYE codes and for its plan to bill 1.4m people for underpaid tax – although this week it confirmed that 250,000 pensioners would not be pursued for tax owed on their state pensions.

Experts said that a benefit of completing a tax return was that it automatically worked out any overpayment, even if a tax code was wrong.

HMRC said that for taxpayers who had been told they no longer needed to fill in a return, it sends out a P810 tax review form annually to allow individuals to register any changes and have their code updated. Taxpayers could also query deductions, though it conceded that the codes could be difficult to understand, and “the onus is on the taxpayer to make reclaims”. Claims for past years are generally made via an R40 form.

Individuals due to fill in returns for the 2009-2010 tax year have until January 31 to do so, or face a £100 penalty. HMRC has already received nearly 3.75m online filings out of the 9.5m returns that are due.

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