50% of income tax self-assessment late-filing penalty are issued to low income group
Approaching 50% of income tax self-assessment late-filing penalties are paid by the elderly or the poor, with the common denominator being that they do not owe any tax. So today I’m asking the question; why is HMRC penalising these individuals, when all they are guilty of is ignorance of the Tax Office’s petty rules?
Late Filing Fines: A bit of background
The vast majority of these individuals have very modest incomes, and not unsurprisingly, believe they don’t have to complete a tax return because they do not have any tax to pay, and therefore there is no need to report anything to HMRC.
This is generally true, but if the individual has been drawn into the income tax self-assessment system for any reason, even by mistake, they are legally required to submit a tax return, until they can somehow be extracted from that system. This can often be difficult to do, as usually needs a conversation with a human on one of the HMRC helplines, and as happened recently, if those helplines are closed, the poor old taxpayer has no chance.
The subject of HMRC’s helpline (or the lack of it!) I have written about countless times, most recently two weeks ago. The arbitrary closure of the helpline for three months has been severely criticised by charities who help those who are elderly or on low incomes. Anecdotally, many individuals, who either can’t afford help from an accountant or don’t know where to look for accurate advice, have instead picked-up inaccurate information through online forums, social media and that infamous friend at the pub.
Late Filing Fines: Being fined for doing nothing
The concept of getting fined for doing nothing is difficult for most people to grasp, particularly when those being fined are in vulnerable groups, but this is exactly what the late filing penalty system does.
When the income tax self-assessment regime was introduced, any fines for late filing were tied to the tax owed. Taxpayers who weren’t liable to pay any tax or due a tax refund could be relaxed about when they submitted their tax return as there was no pressure to file by the relevant deadline. Unfortunately for them, late-filing penalties were introduced for nearly all direct taxes in 2011.
Late Filing Fines: And it gets worse!
The amount of tax owed is immaterial for the first six months, by which time an unwitting taxpayer will have racked up penalties of £1,000, even when they do not owe any tax. This penalty regime now only links the level of fines to any tax owed on penalties applied after six months. And if that taxpayer is over a year late with their tax return, they can easily rack up penalties of £1,600.
Late Filing Fines: How big is the problem?
Tax barrister Dan Neidle’s not-for-profit company, Tax Policy Associates, whose raison d’être is to improve tax policy, and the public’s understanding of tax, has conducted research into the issue recently. They found that HMRC charged nearly half-a-million penalties for the tax years 2018/19 to 2021/22 to people with total incomes below the personal allowance threshold, which amounts to nearly half of all late-filing penalties issued for those years.
This recent investigation is an update on their earlier research 3 months earlier, which resulted in many people getting in contact with their stories of missing the Tax return deadline and receiving unmanageable penalties.
Dan Neidle said, “Many taxpayers will have received multiple late-filing penalty, simply because they don’t understand the penalty appeal mechanism, or how they can extract themselves from the self-assessment tax system. HMRC don’t appear to appreciate that someone on a state pension or receiving a low income can find that even a £100 penalty to be very difficult to pay.”
Late Filing Fines: What should change?
HMRC has responded to the Tax Policy Associates reports citing the proposed changes in the structure of late-filing penalties, which they said would come in on April 6th 2025. The new penalty system would impose points for the first few late submissions followed by a £200 flat-rate penalty.
We have heard this before in relation to the introduction of Making Tax Digital for income tax self-assessment. But MTD is not scheduled to start before April 6th 2026 and there are increasing speculations that this target date is likely to be pushed back even further.
Caroline Miskin of the Institute of Chartered Accountants Tax Faculty noted, “Given the delays to MTD ITSA we won’t see penalty reform in 2025. Implementation is dependent on HMRC moving records from the self-assessment system to its enterprise tax management platform (ETMP) so the current system is likely to continue for some time, especially with the Tax Office’s woeful record on IT changes.”
Tax Accountant’s view
I take the view that HMRC could and should immediately make changes to help low-income individuals who are landed with late-filing penalties and cancel them if it’s clear that the taxpayer has no taxable income.
Additionally, they should proactively remove any low-income individuals who are within self-assessment, from the system; as well as annually publishing their progress with the stated aim of eliminating low-income taxpayers from the hassle and stress of filing tax returns for no legitimate reason.
And you never know, it might just free up enough staff to answer the phone a tad quicker!
David Jones is the Senior Partner and Founder of Morgan Jones & Company. Born in Liverpool and an Accountancy graduate of the University of Wolverhampton, David spent twenty years working for the Customs & Excise in London then Shrewsbury before starting his own business. David's depth of knowledge of the UK tax system and his ability to communicate this learning has seen Morgan Jones & Company grow into Shropshire's most respected Accountancy Practice.