How to handle Self-Assessment tax return penalties and late fees in the UK

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Filing a Self-Assessment tax return in the UK is an important responsibility, but it’s not uncommon for people to miss deadlines or make errors. Unfortunately, failing to meet deadlines or submit accurate information can lead to penalties and late fees from HMRC. Understanding how to handle these penalties and fees is crucial for maintaining your financial well-being and ensuring that you’re compliant with tax regulations.

In this article, Experlu will walk you through the various types of penalties and late fees associated with Self-Assessment, what you can do to avoid them, and how to handle the situation if you find yourself facing one.

1) Understanding the different penalties and fees

HMRC imposes several types of penalties and fees when you miss a deadline or fail to comply with Self-Assessment requirements. Here’s a breakdown of the most common penalties:

Missed Deadlines Penalties

  • Late Filing Penalty: If you don’t submit your Self-Assessment tax return on time, you’ll automatically incur a £100 penalty. This is the baseline penalty that applies to all late submissions, even if you don’t owe any tax.
    • When it applies: 1 day late, starting the day after the deadline.
    • How to avoid: File your return on time, or as soon as possible if you’ve missed the deadline.
  • Ongoing Daily Penalty: If your return is more than 3 months late, you will incur an additional penalty of £10 per day, up to a maximum of £900. This penalty continues until you file your tax return.
    • When it applies: More than 3 months late.
    • How to avoid: File your return quickly to stop daily penalties from accumulating.
  • Six Months Late Penalty: If your return is 6 months late, you will face a £300 penalty or 5% of the tax due (whichever is higher). This is an additional penalty on top of the £100 late filing penalty and the daily penalties.
    • When it applies: More than 6 months late.
    • How to avoid: Aim to file within 3 months to avoid escalating penalties.
  • One Year Late Penalty: If your return is more than a year late, you’ll face another penalty of 100% of the tax due, meaning you’ll pay twice the amount you owe in penalties.
    • When it applies: More than 12 months late.
    • How to avoid: This level of penalty can be avoided by filing your return as early as possible.

Late payment penalties

In addition to filing penalties, HMRC also imposes penalties for late payment of any tax owed:

  • Initial Late Payment Penalty: If you don’t pay the tax due by the deadline (31st January), you’ll incur a 5% penalty of the unpaid tax.
  • Ongoing Penalty: If the tax remains unpaid for 6 months, HMRC will impose another 5% penalty of the unpaid tax.
  • One-Year Late Payment Penalty: After a year, a further 5% penalty will be added.

Interest charges

HMRC also charges interest on any unpaid tax, which will accrue daily starting from the payment deadline. The interest is applied to any amount you owe after the deadline, including penalties.

2) What to do if you miss the deadline

If you’ve missed the deadline for submitting your Self-Assessment tax return, don’t panic. There are steps you can take to minimise penalties and fees:

Step 1: File Your Tax Return ASAP

The sooner you submit your tax return, the less you’ll pay in penalties. If you’re filing late, make sure to submit the return as soon as possible to stop additional penalties from accumulating.

  • Online Filing: If you file online, you can do it quickly and easily through HMRC’s online portal.
  • Paper Filing: If you prefer paper filing, you can submit your return by post, but remember this method must be submitted by 31st October if you want to avoid late filing penalties.

Step 2: Pay What You Owe

Along with filing your return, you should make sure to pay any tax owed. If you’re unable to pay the full amount right away, contact HMRC to discuss your options.

  • Set Up a Payment Plan: HMRC offers a Time to Pay arrangement, allowing you to spread out your tax payments if you’re unable to pay in one go.
  • Partial Payment: If you can’t pay the full amount, make at least a partial payment to reduce the amount subject to interest and late payment penalties.

Step 3: Consider Appealing the Penalty

If you have a legitimate reason for missing the deadline, you may be able to appeal the penalty. HMRC has discretionary powers to reduce or remove penalties if there’s a valid excuse.

Valid reasons for appeal:

  • Serious Illness: If you were seriously ill or hospitalised during the tax return period.
  • Bereavement: If you were dealing with the death of a close family member.
  • Natural Disasters: If unforeseen circumstances like flooding or fire prevented you from filing your return.
  • HMRC Error: If HMRC made an error or failed to send you the necessary reminders.

You can appeal online or by writing to HMRC, explaining the reason for the delay. Make sure to provide any supporting evidence (e.g., medical certificates, death certificates) to strengthen your case.

3) How to avoid late filing and payment penalties

The best way to handle Self-Assessment penalties is to avoid them altogether. Here are some practical tips to ensure you stay on top of your tax filing and payments:

1. Stay Organised

Keeping accurate records of your income and expenses throughout the year will make the filing process much easier. Use accounting software or a simple spreadsheet to track your earnings, business expenses, and receipts.

2. Set Up Reminders

Mark the important tax deadlines in your calendar well in advance. Set multiple reminders leading up to the deadlines to ensure you don’t forget.

3. File Early

Aim to submit your Self-Assessment as early as possible. This gives you extra time to make amendments if needed and can help avoid the last-minute rush.

4. Set Aside Funds for Tax Payments

As a self-employed individual, it’s a good practice to set aside a portion of your income for taxes throughout the year. Consider putting aside 20%-30% of your earnings to cover your tax bill, especially if you’re subject to payments on account.

5. Seek Professional Help

If you’re unsure about the Self-Assessment process or you have complex tax affairs, it may be worth consulting an accountant or tax advisor. They can help ensure that you submit your return on time and make the most of available deductions.

4. Can You Avoid Penalties If You’re Not Self-Employed?

Even if you’re not self-employed, it’s still important to file your tax return on time if you have other untaxed income, such as rental income, interest, or dividends. For employees, HMRC may require a Self-Assessment tax return if you earn above a certain threshold or have income from multiple sources.

5. What Happens if You Continue to Ignore HMRC?

Ignoring HMRC won’t make the situation go away. If you continually fail to submit your tax return or pay your taxes, HMRC can take more severe actions, including:

  • Further Penalties: Continued failure to comply can result in more significant penalties.
  • Enforcement Action: HMRC may begin enforcement action, including taking money directly from your bank account or wages through direct recovery.

If you’re facing a serious issue with your tax return, it’s essential to contact HMRC as soon as possible to discuss your options.

Stay ahead of the game

Filing your Self-Assessment tax return on time and paying your taxes promptly is crucial for avoiding penalties and maintaining a healthy financial record. While it’s important to understand the consequences of missing deadlines, it’s even more important to take steps to avoid these pitfalls.

Key takeaways:

  • File early to avoid penalties and gain more time to make corrections.
  • Pay what you owe as soon as possible to reduce interest charges.
  • Appeal penalties if you have a legitimate reason for missing the deadline.
  • Stay organised to ensure smooth filing for the next tax year.

By staying on top of your tax filing and payments, you can avoid stress and penalties and stay compliant with HMRC’s requirements.