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Nobody ever really wants to pay tax, but underpaying what HMRC think you owe can be a stressful situation to end up in. We’ll look at why this can happen, and what to expect if it does.

How does a tax underpayment happen?

At the end of the tax year, HMRC reconciles millions of taxpayer records to check that the correct amount of tax has been paid. This process is carried out whether you work for an employer, for yourself, or a combination of the two. There will always be some people who have paid too much tax and some who have paid too little.

Tax underpayments can happen for a huge variety of reasons covering everything from honest mistakes to deliberate attempts to avoid paying what is owed, such as:

Those who have paid too much will typically be reimbursed with a tax rebate, but if you don’t pay enough, it can be a bit more complicated.

How will I know if I’ve paid the wrong amount of tax?

HMRC will write to you if they think that you owe more tax than you paid, or if you’re due a refund, but even they can make mistakes! If you do receive a demand to pay more tax (and it’s genuinely from HMRC and not a scam), your first stop is to check your records.

Demands for unpaid tax can be extremely stressful, but don’t just assume they’re correct.

For example, if your only source of income is the wages that you receive from your employer, go back and check your payslips for the time period covered to make sure your deductions match HMRC’s letter. You might find that your employer has made a mistake reporting PAYE, or another error has cropped up along the way.

Similarly, if you’re self-employed check your records, including your tax return. Our article goes into more detail about checking that you’re paying the right amount of tax.

How is underpaid tax collected?

This depends on how much tax you still owe. If the amount of tax you owe is £3,000 or less, it can be collected over the following tax year using your tax code. If the underpayment exceeds £3,000, you’ll be prompted to make a voluntary payment and issued a payment slip with a letter stating the amount you owe (your P800 calculation).

If you can’t afford to pay the amount in full, you can contact HMRC to try and set up a Time To Pay arrangement and pay in installments over a period of time. This isn’t available to everybody though, and HMRC will need to verify your eligibility for this kind of support.

If HMRC realise midway through the tax year that you aren’t paying enough tax, your tax code may be adjusted so you can start paying the correct amount thereafter. HMRC will notify you of this and let you know how it intends to collect the outstanding underpayment amount.

At the end of the tax year, HMRC will verify the actual amount that you have underpaid, as this could alter throughout the financial year. But, as ever, it’s important to check the figures for yourself to make sure everything is as it should be.

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What happens if I don’t pay the tax I owe?

If you’re self-employed, have submitted a tax return and received a tax bill from HMRC, but failed to pay it in full, there can be serious repercussions.

Financial penalties

HMRC will get in touch and issue you with a late payment penalty. This fine is calculated as a percentage of the tax you owe and can increase for as long as the tax is left unpaid.

To give you an idea of what to expect, the current late payment penalties are:

  • 5% of the tax due – after payment is 30 days late
  • An additional 5% of the tax due – after payment is 6 months late
  • A further 5% of the tax due – after the payment is 12 months late

Failure to notify penalties

You’ll also receive a fine from HMRC if your tax status has changed and you haven’t declared this.

This type of penalty ranges from £100 to £3,000 and is influenced by whether or not you disclosed it to HMRC, and if this disclosure was prompted or unprompted.

If you fail to pay the tax you owe and the assigned penalties, HMRC can action legal intervention and instruct debt collection services to recover the costs. It goes without saying that it is highly advisable to avoid getting to this point! Even if you disagree with the demand and any subsequent penalties, it’s better to work with HMRC than to try and ignore it.

A good accountant, Citizen’s Advice, or other financial support services may be able to help – you’re not alone!

What to do if you receive a penalty from HMRC

If you find yourself faced with a penalty from HMRC, you’ve got two options depending on your individual circumstances:

Tips to help you stay on track with your tax payments

  • Practice good bookkeeping habits throughout the year, not just when it comes to tax return submission time.
  • Don’t leave your tax return to the last minute as rushing is more likely to result in mistakes and oversights – the earlier, the better!
  • Budget strictly so that you always have enough money at the end of the financial year to settle your tax bill – including any Payments on Account

Learn more about our online accounting services and how we can help you stay on top of your tax deadlines. Call 020 3355 4047 and get an instant online quote.

About The Author

Lisa Hinton-Hill

I've worked in the accountancy sector for more than 15 years, and have extensive experience supporting sole traders, partnerships, and SME's. Learn more about Lisa.

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