Higher-rate taxpayers and older people are being urged to claim their share of hundreds of millions of pounds of overpaid tax and missed reliefs, ahead of a shortening in the time limit for tax refunds.
Many high earners have not received tax relief that they are entitled to on past pension contributions and Gift Aid donations, say experts, while millions of retired people have paid too much tax on savings interest and pension income - and some have not had their higher age-related personal allowances.
Andrew Tully, senior pensions policy manager at Standard Life, estimates that about 250,000 higher-rate taxpayers have only been getting half the tax relief they are due on contributions to personal pensions, and in some cases could be owed thousands of pounds.
“Higher-rate tax relief is an exceptionally valuable benefit, but many people are not aware they need to claim for it,” he says.
Individual claims for overpaid tax or reliefs that haven’t been received can be made going back to the 2004/2005 tax year through HM Revenue & Customs (HMRC), and repayments may even be topped up by interest – albeit at a current rate of just 0.5 per cent.
However, the time limit for which claims can be made is being reduced from six years to four years.
Self-assessment taxpayers have only until March 31 to make claims for the 2004/2005 tax year, and until April 5 for 2005/2006 – prompting accountants to warn that many thousands are set to lose the opportunity for refunds unless they put in their claims now.
Those not in the self-assessment system, however, have until January 31 2011 to make claims for 2004/2005 and January 2012 for 2005/2006.
Tax advisers say individuals sometimes pay too much tax because of Revenue errors. But tax rules also often put the onus on individuals to claim reliefs, rather than these being given automatically.
The HMRC says “people need to take responsibility” for claiming, adding that it would be “easier if they didn’t overpay in the first place”.
But John Whiting, tax policy director at the Chartered Institute of Taxation (CIOT), says: “HMRC should always be doing more … to ensure people get the right tax bills.”
Here are common ways that individuals miss out, and how they can claim.
● Higher-rate relief on pension contributions.
Higher-rate taxpayers automatically receive 40 per cent tax relief on their contributions to traditional occupational pensions.
But with personal pensions – including self-invested personal pensions (Sipps) – and more modern workplace pensions, including group personal pensions (GPPs) and group stakeholders, only 20 per cent basic-rate relief is given at source.
The additional relief to which higher-rate taxpayers are entitled has to be claimed, generally through a self-assessment tax return or by asking HMRC to change their tax coding. For each £1,000 net paid into a pension plan, this extra relief is worth £250.
Standard Life, the biggest GPP provider, estimates that one in 10 higher-rate pension savers fails to claim. For unclaimed relief from past years, it advises writing to HMRC with details of contributions.
● Higher-rate relief on Gift Aid donations.
Donations to charities under the Gift Aid scheme are automatically boosted by 28 per cent.
But higher-rate taxpayers can also claim back a further 25 per cent of their net donation in personal tax relief.
The Charities Aid Foundation (CAF) estimates that higher-rate taxpayers failed to claim £250m of this additional relief in 2008/2009, partly because of lack of awareness of the break.
Claims for past tax years should be put in writing to HMRC.
● Gross interest on bank and building society deposits.
Bank and building society interest is generally paid net of basic rate tax, with higher-rate taxpayers then liable for an additional 20 per cent, typically through their tax returns.
But individuals whose total taxable income is less than their personal allowance, which could include pensioners and non-working spouses as well as the low-paid, can receive their interest payments gross by filling in R85 forms for their accounts.
However, registering for gross interest isn’t an option for individuals whose income exceeds their personal allowance: they are subject to the 20 per cent deduction on all their interest, and have to reclaim any overpaid tax.
In a recent report, the House of Commons’ Committee of Public Accounts said that 2.4m older people had overpaid about £200m in tax because they had not signed up to receive interest gross.
Claims for refunds of tax overpaid in past years should be made on an R40 form (separate forms for each year) from HMRC.
● Higher age-related personal allowances.
Those aged 65 or over are entitled to higher tax-free personal allowances – £9,490 in 2009/2010 (£9,640 for 75 or older), compared with the standard allowance of £6,475.
Individuals qualify for these higher allowances in the tax year that they turn 65/75 - although the extra relief reduces for those with incomes over £22,900.
HMRC says it sends a P161 form to people coming up to retirement to claim the enhanced tax-free limit but admits that about 500,000 individuals could be missing out. The CIOT suggests the real total may be about 1m.
John Whiting, tax policy director, says an “awful lot” of people do not receive their entitlement because the allowance is not given automatically.
Claims can go back six (reducing to four) years and should be put in writing to HMRC.
● Income tax deducted from pensions.
While the state pension is paid gross, other pensions are paid under the PAYE tax system used for employment earnings, says Whiting.
Tax deductions are based on coding notices that aren’t always correct – particularly where an individual receives more than one pension.
For example, a personal allowance may only be applied to one pension, even though part could also be used to reduce tax on another.
The Committee of Public Accounts estimates that 1.5m older people have overpaid £250m in tax because of such issues.
“Pensions are undoubtedly a huge source of errors,” says Whiting.
Filling in an annual tax return should ensure the right amount of tax is paid overall, but for previous tax years claimants should complete an R40.