A tax refund is a refund on taxes when the liabilities on tax are less than the taxes paid. Taxpayer can get a tax refund on their income tax if the tax they have paid is more than the sum of the total amount of the withholding taxes and estimated taxes which have been paid with refundable tax credit which is claimed. If you are a tax payer then you may have undergone or may undergo someday through this situation. To avoid this type of situation, you must know how to calculate tax refunds.
If you have information of your total income and taxes paid during a specific financial year then you can calculate how much tax you owe. You can be allowed a tax refund if you have paid extra tax or earned below the tax free threshold.
Here are some simple steps to calculate tax refunds:
- Sum up all the earnings you have earned for the financial year for which you want to compute your tax refund and find out your total tax contributions. A financial year runs from April 1st of the running year, to March 31st of the following year. You cannot reclaim taxes until the end of the financial year, other than if you are emigrating.
- Compute your taxable income. You can determine your taxable income by deducting your income tax allowance from your gross income. Your personal income tax allowance is the amount that you are allowed to earn tax free every year and which is generally denoted by your tax code which is given on your wage slips. For instance, the tax code 647L shows £ 6,475, which is your tax free allowance for the year 2010 / 2011.
- Find out your tax band to determine the amount of tax you have to pay. Taxes are deducted at irregular percentage rates and they are in relation to your yearly salary. If you are earning below £ 37,400 per year then you are expected to pay 20 % of your income above your tax free threshold. However, if your income is in between £ 37,400 to £ 150,000 then you have to pay tax on a higher rate of 40 percent. If you are earning more than £ 150,000 then you have to pay tax on a 50 percent tax rate.
- You can use an online tax refund calculator. Many tax agents, who have established themselves on the net as tax refund specialists, provide a free to use tax refund calculator. Put details of your salary and tax contributions for a particular tax year and the calculator will automatically tell you within a few seconds how much tax refund you could be allocated, if there’s any.
- Suppose that for the tax year 2010 / 2011, you have earned £ 36,000 and paid £ 8,500 as taxes. Compute how much your tax refund privilege would be.
£ 36,000 – £ 6,475 = £ 29,525
As £ 29,525 is less than £ 37,000, you would have paid taxes at the basic rate of 20 %. 20 % of £ 29,525 is £ 5,905. This is the exact amount of taxes which you should have paid. After subtracting £ 5,905 from £ 850, you will be left with £ 2,595 which is the amount of tax refund which you might be able to receive.
If you are a tax payer at any place, you need to know how to calculate tax refunds. Many a times, we do not know about tax liabilities and pay more than we require paying. In that case, tax refund calculation is very much needed. I hope you would have learnt to calculate tax refunds from the above article.
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