Are you paying too much tax?

This week the Inland Revenue launched its latest Taxback campaign, aiming to find pensioners, children and others on low incomes who are paying too much tax on their interest from savings.

It is estimated that 4m people have overpaid some £300m in tax and this week Revenue staff have been visiting shopping centres, libraries, old people's homes and other public places to encourage people to claim this money back.

John Andrews, chairman of the Low Incomes Tax Reform Group, says: "Two years ago we recommended that the Taxback campaign be revived. It is an important role of the Revenue to reach out to people who may have tax owing to them and reinforces the view that the Revenue only wants to take tax which is due."

The overpayments arise because banks and building societies must normally deduct tax at 20% from the interest that they pay.

This meets the tax liability of those on average incomes, but if your income is very low you will be overpaying tax. Typically, people overpay because their income is less than the allowances due to them. If your total income falls below your tax allowances, you should not have to pay any tax at all and may reclaim the full amount deducted.

Tax allowances change every April, and vary according to your age and other circumstances, but in the current tax year (2000/01) they range from £84 per week to £178 per week depending on your age and marital status. Your allowances should be increased by a further £1,400 if you are registered blind.

Even if your total income is slightly more than your tax allowances, you may still be entitled to reclaim some of the tax deducted from your interest. This is because the first £1,520 of your income over your allowances should be taxed at just 10%, and so the 20% withheld on your interest is more than the tax due.

If you believe that you have overpaid tax, you need to complete a form R40 obtainable from your tax office (if you have one) or from any office listed under Inland Revenue in your phone book. This form is much simpler than the notorious self- assessment tax return, and the tax office should also be happy to help you work out whether you are entitled to a refund or not.

When contacting the Revenue, consider whether you should also be claiming for past years. Tax refunds can be reclaimed up to six years in arrears, so you can still claim for 1994/95 and any subsequent year.

Where a claim is being made for any year up to April 5 1999, you may also reclaim the tax credits attaching to any dividend income that you received.

Unfortunately, the right to reclaim such credits was abolished in 1999 and so cannot be reclaimed for 1999/2000 or any subsequent year.

While the right to reclaim tax is very handy, it is even better to avoid an overpayment in the first place. If your total income is below your tax allowances, you may register to receive your interest gross in future, by completing a simple form R85 which should be available from the branch where your account is held. Once you have done this, any further interest should be credited without any tax taken off.

It is not permissible to register for gross payment if your total income is over your tax allowances, for example if some of your income is taxable at 10%.

In such cases you will have to continue to claim tax refunds instead. A claim is normally made after the end of each tax year (April 5), although you may reclaim tax during the year once the amount overpaid has exceeded £50.

Parents should consider whether their children are overpaying tax. Any child, however young, is entitled to a tax allowance of £4,385 (in 2000/01) and your child may have been paying tax on their savings income which can be reclaimed in accordance with the rules explained above.

Unfortunately you cannot reduce your family's tax bill by transferring all your savings into your children's names to use up their annual tax allowances. If a child under 18 has savings income above £100 arising from capital gifted to them by a parent, then the income is treated by the taxman as belonging to the parent.

However, it is often possible to mop up unused tax allowances of family members by way of gifts from grandparents to grandchildren, or between husband and wife, as such gifts are not caught by the £100 limit.

More information is available on www.inlandrevenue.gov.uk and www.taxaid.org.uk

• David Brodie is director of TaxAid, the charity which gives free tax advice to people who cannot afford professional fees. Phone 020-7624-3768, 10am to noon, Mondays to Thursdays.