Imagine finishing your tax return, hitting submit, and then discovering months later that you handed over thousands more than you actually owed. Sounds frustrating, doesn’t it? Well, for millions of people in the UK, that’s not just a hypothetical nightmare – it’s exactly what happened last year. New figures reveal that self-assessment taxpayers collectively overpaid a jaw-dropping £8.9 billion. Yes, billion with a B. And the really maddening part? Most of those people have no idea the money is sitting there waiting for them.
I’ve spoken to plenty of freelancers, small business owners, and side-hustlers who shrugged off their tax paperwork until the last minute, only to realise later they could have kept a nice chunk of change. In my experience, the system isn’t broken by accident – it’s just not as forgiving as we’d like when life throws curveballs like reduced income or unexpected expenses. So let’s unpack this properly, because if you’re reading this before the end of January, you might still have time to sort things out.
Why Are So Many People Overpaying Their Taxes?
The biggest culprit goes by the rather innocent-sounding name: payments on account. If you’re new to self-assessment or you’ve somehow avoided this trap so far, here’s the quick version. When you owe tax through self-assessment, HMRC doesn’t just ask for last year’s bill – they want half of it again upfront as a down payment toward next year’s liability. It’s meant to smooth out cash flow and prevent a massive year-end shock, but it backfires spectacularly when your income drops.
Picture this: last year you had a banner twelve months. Maybe you landed a big contract, sold some shares at a profit, or your rental properties were fully occupied. Your tax bill comes in at, say, £10,000. So on 31 January you pay the £10,000 you owe plus another £5,000 as the first payment on account for the following year. Come July, you cough up the second £5,000. Then reality hits – this year’s income is way down. You’ve essentially given the government an interest-free loan based on a year that no longer reflects your reality.
The payments on account system is designed to help spread the cost, but when earnings dip, it turns into an expensive overpayment trap for millions.
– Tax accountant with years of client experience
According to recent data, around 2.6 million people fell into this category last year alone. That’s not a small rounding error; that’s a serious amount of cash sitting in government coffers instead of people’s bank accounts. And unlike some automatic adjustments in PAYE, self-assessment overpayments don’t always get flagged and refunded without effort on your part.
Common Reasons People End Up Overpaying
Beyond the payments on account quirk, plenty of other slip-ups lead to handing over too much. Sometimes it’s simple human error. You enter your gross income instead of taxable profit, forget to deduct allowable business expenses, or claim reliefs you’re not actually entitled to. I’ve seen clients accidentally double-count dividends or miss pension contributions that would have reduced their liability.
Other times it’s more structural. If you’re self-employed and your income varies wildly – think consultants, creatives, seasonal businesses – the previous year’s figure becomes a poor predictor. One good year followed by a quiet one, and suddenly you’re overpaying thousands. Add in inflation, rising costs, or clients paying late, and the mismatch grows even bigger.
- Fluctuating income from self-employment or freelance work
- Forgetting allowable expenses like home office costs, travel, equipment
- Misreporting investment income or capital gains
- Not claiming reliefs for pension contributions or charitable donations
- Errors in entering figures transferred from other tax years
- Overlooking changes in personal allowances or tax bands
Any one of these can push your final bill higher than necessary. Combine a couple, and you’re easily looking at hundreds or even thousands extra paid to the taxman.
Breaking Down the Payments on Account System
Let’s get granular for a moment because understanding the mechanics helps you spot when things go wrong. Payments on account apply if your previous year’s self-assessment tax bill (income tax plus Class 4 National Insurance for the self-employed) was more than £1,000 and less than 80% of it came from PAYE or other taxed sources.
So if your 2024/25 bill was £6,000, you’ll pay:
- £6,000 by 31 January 2026 (balancing payment for 2024/25)
- £3,000 by 31 January 2026 (first payment on account for 2025/26)
- £3,000 by 31 July 2026 (second payment on account for 2025/26)
Then in January 2027 you settle up the actual 2025/26 liability, and any overpayment gets refunded or set against the next bill. The trouble starts when 2025/26 turns out much lower than 2024/25. That £6,000 you prepaid becomes an overpayment, and you have to actively claim it back.
Some people can reduce or eliminate payments on account if they expect this year’s liability to be much lower. You do this by filing a form or ticking a box in your return, but you have to be reasonably confident in your estimate – get it wrong and you could face interest or penalties.
How to Check If You’re Owed a Refund
First things first: log into your HMRC online account. If you’ve already submitted your return, head to the section about overpaid tax. It should show any calculation of refund due. If you filed on paper, dig out your SA302 tax calculation letter and look for the same info.
If nothing appears or you’re unsure, you can amend your return within twelve months of the filing deadline. For the 2024/25 tax year, that gives you until 31 January 2027 to correct mistakes. Once amended, HMRC recalculates and either issues a refund or adjusts future payments.
Pro tip: keep records of everything. Receipts, mileage logs, invoices – they make it much easier to justify deductions if questioned. In my view, treating record-keeping as a monthly habit rather than a January panic saves far more than it costs.
The Claim Process Step by Step
- Sign into your personal tax account on GOV.UK
- Navigate to your self-assessment record
- Check the ‘overpaid tax’ or ‘refund’ section
- If a refund shows, confirm bank details for direct payment
- If no automatic refund appears, submit an amendment or overpayment claim
- Monitor your account for updates – HMRC usually emails when processed
Most online refunds arrive within weeks, but backlogs can stretch to months or even longer in busy periods. Paper claims take even more time. Whatever you do, don’t ignore it – overpaid tax doesn’t earn you interest, but HMRC happily charges interest if you’re underpaid.
Overpaid tax is essentially an interest-free loan to the government. Chase it promptly or you might never see it again.
– Experienced tax practitioner
Avoiding Overpayments in Future Years
The best refund is the one you never need to claim because you didn’t overpay in the first place. Start by reviewing your income and expenses throughout the year, not just in January. Use accounting software to track deductible costs in real time. If your income looks set to drop significantly, consider reducing payments on account early.
Also worth thinking about: spreading income where possible, maximising pension contributions for tax relief, and claiming every allowance you’re entitled to. Small actions compound over time. Perhaps the most underrated strategy is getting professional help sooner rather than later. A good accountant spots reliefs and pitfalls you might miss, often saving far more than their fee.
Let’s be honest – tax is rarely anyone’s favourite topic. But ignoring it doesn’t make the bill smaller; it just makes surprises nastier. With a bit of attention and proactive steps, you can keep more of what you earn and avoid joining the ranks of those who unintentionally overfunded the Treasury.
So next time you’re staring at your self-assessment form, take an extra few minutes. Double-check those figures, review last year’s numbers against this year’s reality, and don’t hesitate to question anything that feels off. Your wallet will thank you – and who knows, you might discover you’re sitting on a nice little refund you never expected.
Have you ever reclaimed overpaid tax? What was the experience like? Feel free to share in the comments – sometimes hearing other people’s stories is the best reminder to stay on top of our own paperwork.
