HMRC have confirmed that in the 2020/2021 tax year over 180,000 individuals earning less than £12,500 annually (the threshold exempting them from income tax) were penalised for neglecting to file their self assessment tax return on time.
Data released by HMRC after freedom of information requests by thinktank Tax Policy Associates (TPA) shows that 92,000 people among the lowest paid 10% of the population were fined by HMRC for late filing of their tax return in 2020-21.
This unfortunate scenario uncovered by HM Revenue and Customs (HMRC) may reveal a systemic issue impacting the most financially vulnerable in society.
In contrast, only 39,000 of the highest-paid 10% received fines in the same tax year.
From 2018-19 to 2021-22 more than 660,000 fines were issued to low income earners according to TPA’s analysis.
HMRC clarified that this does not necessarily represent 660,000 individual fines as some people were likely fined in more than one tax year.
Approximately 58,000 people successfully appealed against the fines reducing the number of low earners fined in the 2020-21 financial year from 184,000 to 126,000 after their self assessment late penalty appeal.
Self assessment and low earners
The analysis of the 2020-21 fiscal year showing that approximately 184,000 low income earners were fined for failing to complete their tax represents a fraction of the total 32 million taxpayers in the UK.
Most taxpayers are not obligated to submit a tax return as their sole income (aside from modest savings) comes directly from their employer and is automatically taxed at the source through the pay as you earn system (PAYE).
However around 11 million individuals must submit a self assessment income tax return if they meet HMRC SA criteria for other reasons like self employment or expenses of employment worth over £2500.
Dan Neidle founder of TPA said:
“People are falling into debt and, in one case we’re aware of, becoming homeless as a result of HMRC penalties.”
This troubling quote encapsulates the gravity of the situation. Many people already struggling financially misunderstood the initial fine and were subsequently subjected to additional fines and interest.
Some were left facing penalties amounting to thousands of pounds, which would take them many years to repay.
HMRC’s response
An HMRC spokesperson acknowledged the issue, stating: “The government has recognized that taxpayers who occasionally miss the filing deadline should not face financial penalties, and has already announced reform of the system.”
They emphasized that deadlines are necessary for the tax system’s efficient functioning and encouraged anyone who doesn’t need to file a return to inform HMRC.
The spokesperson assured that their aim is to support all taxpayers regardless of income to correctly manage their tax obligations.
Self assessment late filing penalties
The penalties for late filing can be quite severe. If HMRC requires a taxpayer to submit a tax return and they miss the deadline (31 January), a £100 automatic late filing penalty is applied.
Three months past the deadline, the penalty can increase by £10 each day. After six months, a flat £300 additional penalty can be applied, and after 12 months, another £300. At this stage, total penalties can amount to £1,600 per tax year.
Dan Neidle founder of TPA, voiced his concern over the current system. “Nobody filing late should be required to pay a penalty that exceeds the tax they owe,” he said.
Self assessment penalties and appeals
If you find yourself in a position where you have received a late self assessment tax return filing penalty you can appeal to have it cancelled.
Our self assessment penalty appeal guide to support you through the SA appeals process with HMRC.
In some cases you might not even meet criteria which means the tax return that has been requested can be cancelled and with it any late penalties.
The SA system sometimes needs updated with information that can only come from the individual so if you think that you have been asked to complete a tax return in error you should tell HMRC as soon as you can.
You can use the HMRC online check if you need a tax return service to assess your self assessment criteria.
Self assessment reform for low earners
The penalties for late SA filing appear to disproportionately affect low income earners meaning some reform should be considered.
Let’s hope for a fairer self assessment system that’s more supportive of the most financially vulnerable in our society.
