Most people working in the UK do not need to submit a self assessment tax return to HMRC to declare their income as they are taxed at source by their employer under the PAYE scheme. However, a quarter of taxpayers do have to declare their financial standing to the Taxman each year if they are self employed, earn over £150,000, have multiple sources of income, pension income and some other scenarios.
The situation that has this week got HMRC into hot water is the revelation revealed by an FOI (Freedom of Information Request) by a think-tank called Tax Policy Associates. Of over 40 million taxpayers, 10 million or so were asked to submit tax return and these had to be handed in by January 31st at the latest (online). Missing the deadline leads to instant fines and then penalties levied at regular intervals thereafter.
The penalties are harsh because they have a snowball effect. £100 immediate, then £10 a day after a three months - then a further £300 after six months etc - it compounds to a large amount rather quickly. The controversy arises because they will apply regardless of whether any tax was owed or not - those who owe tax would incur surcharges on the outstanding amount and interest but those without tax due would have these fixed penalties applied.
A decade ago these penalties would be reversed if once a tax return was submitted it was found there was no tax actually due - but this rule no longer exists - and this is now revealing an unfair situation particularly in light of the cost of living crisis and impact of low earners.
From the cohort of tax returns due last January, 126,000 of those required to submit were fined but were earning less than the personal tax free allowance (£12,500) and this meant no tax was actually due.
Of the lowest earning 10th percentile of people with some kind of income, over 90,000 people were fined. On the flip-side, of the top earning 90th percentile, less than half that number were fined (40,000).
In the three year period leading up to 2022 nearly 700,000 fines were applied to self assessment taxpayers' accounts - this is before appeals.
HMRC have stated that a reform of the system of penalties is in progress and reminds people that they should contact them if they think they shouldn't need to file a self assessment.
This year an estimated 600,000 people missed the tax return deadline for 2023.
Whilst HMRC are pushing the statistics of the increase in numbers of early filers, they are still netting large amounts through penalties and interest on overdue taxes.