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All you need to know about penalties: do not let your wallet suffer

05/04/2016 08:08 am

Even though the UK’s tax system is relatively flexible, it is also quite strict – penalties are “earned” quite easily. This blog post will look at the most common penalties, explaining what they are for and how much you could be penalised.

We are going to look into two type of penalties:

  1. Penalties relating to the self-assessment tax return.
  2. Penalties relating to late tax payments.

Penalties relating to Self-Assessment

If you have received a tax return form, you are obliged to fill it in and submit it even if you do not owe any tax. You must submit your paper tax return between 6th April and the last day of October. Tax returns can also be submitted online until the end of January of the following year.

Penalties for late submission

Please note that you may be charged a penalty for late submission of a self-assessment tax return, even if you do not owe any tax.

  • If you are late in submitting the annual tax return, you will be charged £100.
  • If you are more than 3 months late, each extra day will cost you an additional £10. This daily penalty fee is applicable for 90 days in a row and the maximum amount can add up to £900. A further fixed amount of £100 will also be added to the penalty, therefore you might be obliged to pay £1000.
  • If you are 6 months late, you will have to pay the above-mentioned penalties and also a fine of either £300 or 5% of the tax due, whichever is the higher.
  • If you are 12 months late, you will have to pay the above-mentioned penalties and also another £300 fine or 5% of the tax due, whichever is the higher.

Keep in mind that, in really serious cases, HMRC might charge you up to 100% of the tax due instead, as well as any tax you owe, doubling your payment.

Penalties for incorrect tax return information

If you are in a rush or do not have sufficient tax-related knowledge, you may well make some mistakes in your tax return. This might make your wallet thinner and if HMRC decides that you were trying to mislead them on purpose, your wallet will suffer even more.

Penalties are based on the amount of tax you owe and are payable in addition to the tax owed.

    If HMRC decides that you have been careless with your tax return, you will have to pay between 0% and 30% of the extra tax owing.
  • If HMRC decides that you have deliberately underestimated your tax, the penalty will be between 20% and 70% of the extra tax owing.
  • If HMRC decides that you have deliberately underestimated your tax and attempted to hide the fact, the penalty will be between 30% and 100% of the extra tax owing.

Such a penalty system is rather subjective and depends on how HMRC treats your case. Therefore, it is worth investing time in filling in your tax information properly. If you make a mistake but manage to prove that it happened by accident, rather than its being intentional, you might avoid paying the penalty.

Penalties for late tax payment

You can get a penalty not only for the late submission of your tax return or for submitting incorrect information but also if you are late paying your taxes.

  • If you are late paying your taxes, you will be charged 5% of the tax due.
  • If you are 6 months late, you will be charged 5% of tax outstanding at that date.
  • If you are a year late, you will be charged 5% of tax outstanding at that date.

Keep in mind that you have to pay taxes for this year by 31st January of the following year.

Do not get into trouble

During our 10 years of practicing, we have heard a number of stories of self-employed freelancers receiving a penalty that could have been easily avoided. Here are the top 3 cases along with Right Accounts’ explanations as to why the penalty was given.

I have received a penalty for not submitting a tax return even though last year I did not earn anything as a self-employed freelancer.

If you are registered as a self-employed freelancer, you are obliged to complete and submit a tax return even if you did not earn anything.

I have received a penalty for not submitting a tax return even though I paid all my taxes on time.

If you are self-employed and pay your taxes it does not mean that you do not have to fill in a tax return. You must still do it! You also have to do it even if there are no taxes due.

I have received a penalty for submitting a paper tax return late, even though there was plenty of time left before the deadline for online returns.

There are two different deadlines for paper and online submissions. If you missed the deadline for a paper version, do not send it after the deadline as it will earn you a penalty. If you missed the deadline for the paper tax return, complete the online one instead and avoid the penalty.