What to do if you're overpaid

Tax overpayments are more common than you might think. For UK taxpayers—including business owners, PAYE employees with side gigs, freelancers, limited companies, and sole traders—overpaying tax can seriously impact cash flow. Such errors often stem from incorrect tax codes, overestimated profits, or mistakes in payroll and accounting records. Reclaiming overpaid taxes not only safeguards your finances but also promotes better tax compliance in the future. What’s more, taking the right steps to identify and address tax overpayments doesn’t have to be as complex as it sounds. This guide outlines common scenarios in which overpayment occurs, how to resolve these issues with HMRC, and how expert assistance can simplify these processes. Overpayment Due to the Wrong Tax CodeExample: Sarah, a PAYE employee with a side gig.Sarah works full-time at a marketing agency but also takes on freelance graphic design projects on the weekends. Unbeknownst to her, she had been assigned an emergency tax code for her part-time side gig income, leading to higher-than-necessary tax deductions. Why It Happens Incorrect tax codes can result from job changes, having multiple sources of income, or administrative errors. These codes dictate how much tax HMRC takes from your earnings, and an error can lead to overpayment. The Solution Fixing this issue involves checking your tax code and contacting HMRC to request a correction. Here's how you can do it:Review your tax code on your payslip (e.g., “1257L” is the standard code for many UK taxpayers).Use HMRC’s online tax code checker (link to HMRC tax code guidance).Contact HMRC via their helpline or online service to explain your situation.Request a refund for overpaid income tax once the correction has been made. Pro Tip: Online accountants can help identify incorrect tax codes and facilitate the refund process. Partnering with an expert ensures nothing gets overlooked. Overpayment Due to Overestimated Profits Example: Ahmed, a sole trader running an online business. Ahmed’s quarterly VAT return included an overestimated profit projection, resulting in a higher VAT payment to HMRC. This error tied up extra cash that his business could have used for growth. Why It Happens Sole traders and freelancers often rely on projected profits for VAT returns or payment on account calculations. Overestimations can occur due to guesswork or lack of real-time financial tracking. The Solution Reclaiming overpaid VAT or income tax due to overestimations requires:Reviewing your records to calculate accurate profits and VAT.Using HMRC’s Making Tax Digital (MTD) platform to amend and resubmit your VAT return.Approaching HMRC direct to request a refund for any overpayments. Pro Tip: Chartered accountants can assist with creating more accurate profit forecasts, helping you avoid future overestimations and improving cash flow stability. Overpayment Due to Errors in Accounting Records Example: David, the director of a limited company. David realised his bookkeeping software had mistakenly recorded duplicate income entries. This led to inflated profits and higher corporation tax payments. Why It Happens Common bookkeeping errors, such as duplicate entries or incorrect expense classifications, contribute to higher declared profits and subsequent tax overpayments. These mistakes can be caused by mismanagement or inadequate accounting systems. The Solution Avoid these issues by:Regularly reconciling your accounts to identify discrepancies.Correcting errors in accounting records and generating updated profit-and-loss statements.Resubmitting amended corporation tax returns to HMRC, along with supporting evidence, to request a refund. Pro Tip: Professional UK accounting firms can help with accurate bookkeeping and ensure that adjustments are submitted correctly to HMRC. Overpayment Through Payroll Errors Example: Emily, a freelancer with employees. Emily employs a part-time assistant to help manage her workload. Mistakenly, she overpaid her assistant’s employer contributions due to incorrect payroll software settings. Why It Happens Payroll miscalculations often occur when settings like tax and National Insurance thresholds are applied incorrectly. This is especially common in small businesses or freelance operations using manual payroll systems. The Solution Steps to resolve payroll errors include:Conducting a thorough payroll audit to check calculations.Identifying overpayments of PAYE or National Insurance contributions.Correcting errors through your payroll software and using HMRC’s PAYE system to reclaim overpayments. Pro Tip: Virtual accountants can streamline your payroll processes, ensuring compliance with UK regulations and preventing costly errors. Why Reclaiming Overpaid Tax Matters Improved Cash Flow: Recovering overpaid amounts can free up vital cash for personal expenses or business investments. Accurate Financial Management: Resolving errors improves your overall financial health and ensures greater accuracy in future reporting. Compliance with HMRC: Correcting tax errors ensures your tax records meet HMRC’s standards, reducing the risk of future investigations. Take Control of Your Tax Affairs Today Identifying and reclaiming overpaid tax can be daunting, but you don’t have to do it alone. Whether you’re a sole trader, small business owner, or PAYE employee with multiple income sources, reclaiming what’s rightfully yours starts with finding the right support. At Virtue Accountants, we specialise in helping UK taxpayers manage their tax obligations with confidence. From addressing tax code errors to adjusting VAT returns, our team of experts ensures you’re in compliance while maximising your financial efficiency. Get in Touch Today! Contact us now for tailored advice and support in reclaiming overpaid tax. Reduce unnecessary tax liabilities, maintain healthy cash flow, and ensure peace of mind with Virtue Accountants by your side.