Tax deductions of salaried taxpayers are undertaken through their employers under the PAYE system. Through this blog post, we will discuss what it means by having your tax refunded on the payslip. In addition to this, we will also discuss the details of tax refunds, how to apply for them; as well as the process through which tax codes are assigned to individuals and tax amounts dedcuted from their incmoes.

What Is Tax Refund On Payslip?

A tax refund on the payslip means that as a salaried employee, you have overpaid tax under the PAYE system and are due for a tax refund from HMRC.

At the end of a tax year, HMRC sends all taxpayers a P800 form which outlines details of their incomes and tax deductions for the entire tax term. Sometimes, you will find through the P800 that you are due for a REfund. If this is the case, you will also be told whether you will be repaid the amount through an online bank transfer or a cheque sent through the post.

If not, you can reconcile your bank statements and books of accounts to make sure that the document does not carry incorrect data and then contact the HMRC. To calculate your taxes and income accurately before contacting the HMRC, you will need the following:

  • your form P60 and/or P45 from your employer(s) or pension provider(s)
  • your form P11D from your employer, if you receive taxable benefits-in-kind
  • details of taxable state benefits that you have received
  • bank statements and  Building society statements 
  • dividend certificates
  • details of rental income and expenses

When you call HMRC about your tax refund due to overpayment, you must make sure that you have the following information available with you:

  • your personal details: including  your full name, address and date of birth
  • your National Insurance number
  • details of your employers or pension providers and their PAYE scheme reference number
  • Detailed estimates of your earnings and/or pensions from each source for the current tax year (with documentation)

Why Have I Overpaid My Taxes?

The reason(s) why salaried individuals may overpay their taxes through a PAYE scheme may be classified as follows:

  • They started a new job and were assigned an emergency tax code on a temporary basis
  • Their employer used an incorrect tax code
  • They held a job for a part of the year (and not the entire tax term)
  • They had more than one job at the same time
  • They are a student who only worked during holidays
  • Their “other incomes” have been reduced
  • They stopped working in the middle of the year and had no taxable income or benefits
  • Their circumstances changed; such as moving from full time to part-time work

In the case that a taxpayer has overpaid their tax due to any of the following reasons, 

  • being put on an emergency tax code due to starting a new job,
  • having two jobs simultaneously, or
  • switching from a full time to a part-time job

they can claim a tax refund and reclaim the amount from HMRC after the end of the tax year. Claims for overpaid taxes can be made up to four years. This means that an overpaid tax in 2022 can be claimed until 2026.

Tax refunds are usually paid by HMRC within 5 working days directly to the claimant’s UK account. If you do not claim it within three weeks, HMRC will send you a cheque through the post.

How Can I Claim A Tax Refund?

To claim a tax refund, you will need to use the P60 form and share the following details with HMRC:

  • your earnings in total
  • the amount of income tax that you have paid
  • the amount of income tax that you have paid in excess

Additionally, you must also provide details of your National Insurance number and employer reference number.

In the case that a taxpayer has overpaid their tax due to any of the following reasons, 

  • being put on an emergency tax code due to starting a new job,
  • having two jobs simultaneously, or
  • switching from a full time to a part-time job

they can reclaim the amount from HMRC after the end of the tax year. Claims for overpaid taxes can be made up to four years. This means that an overpaid tax in 2022 can be claimed until 2026.

You will also need your P60 form in the following situations:

  • to reclaim overpaid tax
  • to apply for tax credits
  • to serve as proof of income (if someone applies for a loan or a mortgage)

What Is An Example Of A P60 Tax Refund?

To claim a tax refund using the P60 form, claimants will need to share the following details with HMRC:

  • their earnings in total
  • the amount of income tax that they have paid
  • the amount of income tax that they have paid in excess

Additionally, they must also provide details of their National Insurance number and employer reference number.

In the case that a taxpayer has overpaid their tax due to any of the following reasons, 

  • being put on an emergency tax code due to starting a new job,
  • having two jobs simultaneously, or
  • switching from a full time to a part-time job

they can reclaim the amount from HMRC after the end of the tax year. Claims for overpaid taxes can be made up to four years. This means that an overpaid tax in 2022 can be claimed until 2026.

What Should I Do To Reclaim Overpaid Taxes On Pension?

To reclaim overpaid taxes while withdrawing funds from their pension, you can use the P55 introduced by HM Revenue and Customs for the tax year 2021-22. 

This form is only to be used if claimants:

  • do not have a P45
  • are not employed to work
  • are not claiming benefits

To access the P55 form online, claimants can use their Government Gateway user ID and password. If they don’t have one, they can register for the same.

What Is An Emergency Tax Code?

An emergency tax code or a non-cumulative tax code is one that only takes into account the period in question for your tax calculation and deduction. This means that depending on whether you receive your pay on a weekly or monthly basis, a non-cumulative, temporary tax code will apply for that specific period only and it may change the next time you receive a payslip. In the case of weekly pay, you will find a W1 extension at the end of your tax code; while for a monthly salary your tax code will end with an M1 extension.

This means that the income tax rate is applied to the entire sum of income(s) of an individual without the deduction of Personal Allowance from their earnings. In case an individual has paid a sum of income tax before a non-cumulative tax code is applied to their income, the amount cannot be adjusted. Therefore, there are chances that taxpayers will end up overpaying their taxes when a non-cumulative tax code is assigned to them in the middle of a tax term.

However, this overpaid amount is recoverable by contacting the HMRC and updating your employment information with them.

What Are Tax Codes?

Tax codes are a combination of letters and numbers that determine the amount of income tax due on an individual. While the letters indicate your financial position and how it relates to your personal allowance, the numbers tell your employer pr pension provider the amount of tax-free income that you are eligible for in that tax year. 

For instance, 1257L (currently the most common 2021-22 tax code in the UK) refers to the new Personal Allowance rate for 2021-22, which is £12,570 and the letter “L” indicates that the individual is entitled to this amount of tax-free income. Any taxes that are to be charged will be above additional amounts beyond this figure.

How Are Tax Codes Assigned?

The following steps are followed by the authorities while assigning tax codes:

  • Step 1: Your tax allowances are calculated. In most cases, this is an individual’s personal allowance added to any other allowances and job expenses.
  • Step 2: Your deductions are calculated. These are incomes for which tax has not been paid and may include any part-time work or certain state benefits.
  • Step 3: The deductions are subtracted from the tax allowances. The result is your pre-tax income. If this amount equals personal allowance, your income remains tax-free.

Conclusion:

Through the discussion above, we have come to learn that there may be times when salaried individuals might find through their payslips that they have overpaid taxes. This is usually found out through the tax code assigned to them which is supposed to change with a change in income and circumstances. It is common for such overpayments to occur when a taxpayer changes jobs or employment status and can easily be refunded through HMRC. 

FAQs: What Is Tax Refund On Payslip?

What is the meaning of a tax refund?

A tax refund is the reimbursement of overpaid taxes from HMRC to taxpayers at the end of the tax year. Sometimes individuals overpay their taxes due to a change in job or employment status. When they claim this overpaid amount, it is a tax refund.

Why do we get a tax refund?

You get a tax refund when you have more than your due share of taxes to the government. In most cases, you will fill in a P800 form at the end of a tax year to claim a tax refund.

Are tax return and tax refund the same?

No, they are not the same. A tax return is a process of filing due taxes by those eligible to pay tax at the end of the tax year if they are not paying taxes through the PAYE system. A tax refund is the return of overpaid taxes from HMRC to the respective taxpayer.

Do HMRC automatically refund overpaid tax?

HMRC refunds overpaid tax; it may be done automatically at times, while you may need to apply for it at certain times.

How long does it take to get a tax refund?

Tax refunds are usually paid by HMRC within 5 working days directly to the claimant’s UK account. If you do not claim it within three weeks, HMRC will send you a cheque through the post.

References:

Refunds for employees – TaxAid TaxAid

What if I pay too much tax?

Understanding Deductions on Your Payslip

How do I claim back tax I have overpaid through PAYE on wages or pensions? | Low Incomes Tax Reform Group

Claim a tax refund – GOV.UK

Estimate your Income Tax for the current year – GOV.UK

What if I pay too much tax?

Cumulative and Non-Cumulative Tax Basis – PayFit

Emergency tax codes – Which?

What your tax code means – GOV.UK

Tax codes – GOV.UK

P60 tax refund examples – what do you need to know?

Claim back a flexibly accessed pension overpayment – GOV.UK

What was missing from this post which could have made it better?

John has 22 years of experience in financial services. This spans across financial research, financial services (As a qualified mortgage broker and underwriter), financial trading and sales at global investment banks. While working as a publishing research analyst, he covered European bank credit and advised institutional clients on investment strategies at both JP Morgan and Societe Generale. John has passed all three levels of the CFA (Chartered Financial Analyst) programme.

John has 22 years of experience in financial services. This spans across financial research, financial services (As a qualified mortgage broker and underwriter), financial trading and sales at global investment banks. While working as a publishing research analyst, he covered European bank credit and advised institutional clients on investment strategies at both JP Morgan and Societe Generale. John has passed all three levels of the CFA (Chartered Financial Analyst) programme.