What's the difference between a tax rebate and a tax return?​

Tax rebate vs tax return

What is a tax rebate?

A tax rebate or tax refund is the money you're owed back when you've paid too much tax. Sounds simple enough, right? But if your tax is taken care of automatically by the Pay As You Earn (PAYE) system, then why might you end up being owed a rebate?

Normally, with PAYE, the tax you owe is taken out of your pay automatically by your employer. It happens before you even get paid, and most people never even think about it. However, the taxman won’t always have all the information he needs to work out how much tax you should be paying. That’s where you end up handing over too much tax.

There are a few ways this can happen – with the biggest usually being your work expenses. When you’re paying from your own pocket for certain types or work travel or other essential expenses, you can get what HMRC calls “tax relief” on those costs. Basically, the fact that you’re spending your own money to do your job can bring down the amount of tax you owe.

There are many kinds of everyday work costs that can earn you some tax back from HMRC each year, from upkeep of work-specific clothing or equipment to subscription fees for professional bodies. Most people never get back what they’re owed, though, either because they don’t have the necessary tax refund expertise or they never even realise they’re due a rebate.

Tax Rebate vs Tax Return

What is a tax return?

If you’re self-employed, an HMRC Self Assessment tax return is the form you use to tell the taxman all about your income, expenses and other important information to do with your business. HMRC uses that information to work out how much tax you owe.

Even self-employed people using the UK Self Assessment system to sort out their tax can end up paying too much. Builders working under the Construction Industry Scheme, for example, lose a 20% chunk of their pay before they even get it. That sometimes means they don't get the full benefit of their tax-free Personal allowance, and are owed some tax back.

Because of the way the UK Self Assessment rules work, many of the day-to-day costs of running your business can bring down the amount of tax you pay. For that to happen, you need to include them in your tax return, where they’ll count against the profits you’re being taxed on. If you’re self-employed, instead of claiming back what you’re owed through a PAYE tax refund, you tell HMRC all about your essential work expenses in your Self Assessment tax return. HMRC then takes those expenses into account when calculating your overall tax bill.

It’s important to understand that Self Assessment returns aren't just for the self-employed, either. There are lots of reasons you might need to file one each year. Even if you’re employed and pay your tax via PAYE, you might have additional sources of income to declare (like rent) or be the director of a company, for example. Even claiming any PAYE tax refunds you're owed often means sending a tax return to HMRC – which is partly why people sometimes get confused.

Knowing how the Self Assessment system works is crucial if you want to get the best out of it. A lot of people end up paying too much tax, simply because they don’t understand the rules, or don’t know how to fill in their tax returns properly.