Are You Paying More Tax Than You Need To?

If your most recent tax bill or payslip deduction is higher than you expected, then you might be wondering why.

In this guide Emma Clifton, Business Advisory Partner explains the most common reasons why your tax might be higher than you thought and what you can do to check it, correct it, or reduce it in future.

Tax is based on total income, not just your job.

The most important thing to know about income tax is that it is calculated on your total taxable income across all sources. This includes employment income (paid via PAYE), self-employment, rental income, dividends and savings interest (as well as some other things like certain benefits).

If your combined income pushes you over a threshold, you may find yourself paying more tax than expected, even if no single income source is especially high.

This is often the case for people with a full-time job who also earn freelance income or investment income. What seems like “extra money on the side” can trigger higher tax when everything is added together. Moving into a new tax band affects your net “take-home” pay

The UK tax system applies different rates to different portions of income. While only the income above each threshold is taxed at a higher rate, the jump can still feel significant.

You may also lose your personal allowance if your income exceeds one hundred thousand pounds, which increases the effective rate of tax on that portion of income. This can be especially surprising when a small increase in income results in a much larger tax bill or a noticeable drop in your take-home pay.

PAYE deductions can vary for several reasons

If you are paid through PAYE, your payslip deductions can change due to factors like an emergency tax code, an incorrect code, or because your personal allowance is not being applied properly.

Other deductions such as student loan repayments, pension contributions and benefit-in-kind taxes (like company cars or health insurance) also reduce your net pay.

Multiple income sources under PAYE, such as a second job or freelance work, can also result in HMRC applying a basic rate tax code without allowances to one of them. This can cause you to pay more tax upfront than necessary.

Bonuses and one-off payments can trigger higher deductions

It’s really important to understand that HMRC calculates PAYE tax based on the assumption that each month’s earnings represent your average annual income. So, if you receive a bonus, commission or unusually high payment for a month, it can temporarily push you into a higher tax band, even if your usual monthly earnings are lower. This method can result in overpaying tax that will later be adjusted through your tax code or refunded at the end of the tax year.

Although this system is designed to keep things simple across the year, it can be frustrating when a single month’s income causes an unexpectedly high deduction.

Self-employed tax bills can spike unexpectedly

If you’re self-employed, a high tax bill often results from either not claiming all allowable expenses, underestimating your income or failing to reduce your payments on account in time.

Payments on account can be particularly confusing: you may find yourself paying part of next year’s bill alongside this year’s, which inflates the amount due in January.

Many self-employed people also underestimate how much they need to save throughout the year, which makes the final bill feel harsher than it actually is. The imminent changes with Making Tax Digital for Income Tax should help to alleviate this somewhat with its more regular quarterly reporting, giving you a better indication of future liabilities.

How to check if your tax is correct?

If your tax seems too high, the first step is to log in to your HMRC personal tax account.

From there, you can review your tax code, income summary, previous returns and PAYE history.

Your payslip may also include useful breakdowns of tax and other deductions. If anything seems off, you can contact HMRC directly or speak to a qualified accountant to help you understand what is going on and whether any corrections need to be made.

Need support understanding your tax bill?

A higher-than-expected tax bill does not always mean something is wrong; but it does mean it is worth checking. We can help you review your income and allowances, make sure you’re on the correct code and spot any reliefs or deductions you may have missed.

Contact Emma or one of the team today by calling 0330 058 6559 or email hello@scruttonbland.co.uk