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:
A mistake with your tax code, or it’s adjusted mid-year
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.
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.
Comprehensive tax return services
From only £24.50 per month
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.
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.
Debt recovery and legal action
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:
Pay the fine and settle any tax due
Appeal the penalty if you think HMRC might have made an error, or if there’s a ‘reasonable excuse’ for your delay in paying the appropriate amount of tax
Tips to help you stay on track with your tax payments