Around 600,000 late-filing penalties have been paid to HMRC in the last five years by some of the lowest earners in the UK despite them not owing any tax, according to Tax Policy Associates.
Missing the filing deadline of January 31 for a self-assessment tax return will generate a £100 penalty, but if people are unaware or unable to deal with this swiftly, then the debt can snowball into thousands of pounds. One woman, with severe mental-health difficulties, ended up being pursued by HMRC for £10,000, while someone else was forced into bankruptcy by HMRC, according to Tax Policy Associates. HMRC makes more people bankrupt in the UK than any other organisation.
Tax Policy Associates put in a Freedom of Information request asking HMRC about the issue and for information about how much those affected by these penalties earn, and the information it received turned out to be alarming.
Why is this happening?
Failing to file your tax return on time automatically generates a £100 penalty, even if there is no tax to pay. Sadly, the people being affected most keenly by these penalties are those who are least able to pay tax as their incomes are so low.
For example, 50% of the penalties being charged on earners in the first three deciles – the lowest earners in the UK – are being paid. This amounts to around £28m over five years, and is being paid by people earning so little they don’t even pay tax. In total, 902,242 non-taxpayers were sent penalties by HMRC over this period, but 305,044 of these were successfully appealed.
Part of the problem seems to be that HMRC doesn’t make it clear in the letters sent out to notify people of the penalties that they can have the penalty reversed if they can show they shouldn’t have been penalised, or that they don’t earn enough to pay tax in the first place and should not be filing a self-assessment tax return. The current personal tax threshold is £12,570, and anyone earning less than this doesn’t have to pay tax on their income.
However, if you earn just £1,000 as a self-employed person, you are obliged to file a tax return, and if you are charged the £100 penalty and don’t file your return or pay the penalty within 12 months, then you could face a bill of as much as £1,600, according to Tax Aid.
How can this be stopped?
The easiest way to stop this happening – and something that is being called for by tax experts such as the Low Incomes Tax Reform Group, Tax Policy Associates and Tax Aid – is for HMRC to change its policy. But until that happens, it is vital that low-income earners, along with everyone else, realise exactly what their rights are if they are sent a penalty notice by HMRC.
The problem is also exacerbated because it has become more difficult to contact HMRC to get assistance, which is a wider problem affecting all taxpayers, and now even tax agents, such as accountants. Anecdotal evidence suggests these dedicated lines to HMRC are currently harder to get answered, with long waits before a call is answered.
Changes to the rules are in the pipeline, which will see penalties limited to a maximum of £200. But the timing of the implementation for all taxpayers is unclear. This change, among others, will come in as part of the Making Tax Digital regime. From April 2026, this will apply to people earning £50,000 or more. From April 2027, it will apply to those earning £30,000 or more, and to those earning £20,000 or more from April 2028.
More fundamentally though, it is important for everyone to know – not just low earners – that if you have a penalty from HMRC which you believe is incorrect, then you need to appeal it. Whether you do that yourself or with the help of an accountant will depend on your personal circumstances, but never simply pay a penalty you don’t agree with.
How do I appeal an HMRC penalty?
When you get the penalty notice, you have 30 days from the date the penalty was issued to contact HMRC to appeal it. If you file your appeal online, then HMRC will receive it immediately, so you don’t need to worry about your appeal getting lost in the post. You can appeal online at Gov.uk.
Before you begin the appeal process, you will need
- The date the penalty was issued.
- The date you filed your Self-Assessment tax return (if you have submitted it).
- The date you paid your tax (if you have paid it).
- Details of your reasonable excuse for filing your return late or not making your payment on time.
Source: Gov.uk
You can also ask your accountant to make the appeal for you, which for many people will be easier.
