Income tax debt

What is income tax?

Income tax is the statutory tax you pay on income you receive. This money is collected by HM Revenue and Customs (HMRC).

You should treat income tax debt as a priority debt. This is because the consequence of not paying it could lead to bailiffs or court action.

As the income tax year runs from 6 April every year to the following 5 April, you need to complete and send HMRC a tax return, detailing your business’s income and outgoings by a set deadline. The postal deadline is usually 31 October following the end of the tax year. If you submit your income tax return online, the deadline is usually 31 January following the end of the tax year.

This is always easier to do when you keep accurate and up to date records of receipts, invoices, etc. With Making Tax Digital now in place, this may take less time. You can do this yourself or you can use an accountant if numbers aren’t your forte.

What happens if I don’t pay my tax bill on time?

When you don’t pay your income tax on time, you’ll receive an income tax demand. This will show you what you owe as well as any interest or penalties. As soon as this happens, go back and check that you’ve done everything correctly.

Checklist:

  • Have you actually sent in your income tax return? If not, what you’ve received will be for an estimated amount.
  • Was your form correctly submitted and did you include up to date information about your income and expenses?
  • Did you make full use of any tax allowances that you were entitled to?
  • Are the interests and charges right?
  • Should you appeal? You can find out more about this here.

What happens if I miss the deadline?

Even missing a day will cost you £100 and then it’s £10 a day up to a maximum of £900 on top of the fixed penalty.

After six months, you’ll need to pay £300 or 5% of the tax due on top of the fixed penalty.

After 12 months, the penalty is a further £300 or 5% of the tax due as well as the fixed penalty, and it could rise to 100% of the tax due in serious cases.

What if I am late paying?

If you make a time to pay arrangement before penalties would have been applied, you won’t have these added to your debt.

My tax bill was estimated and I’ve missed the deadline

In this scenario, you may be able to claim ‘special relief’ – this scheme gives HMRC the choice not to recover estimated income tax debt in some circumstance. These include:

  • Believing it would be clearly unreasonable to recover the estimated debt
  • Recognising your commitment to bringing your income tax affairs up to date if they aren’t already
  • Acknowledging that this is the first time you’ve claimed relief.

You’ll need to write to the office dealing with your debt to explain your reasons and justification.

If successful, you’ll have to pass HMRC information about your income and outgoings for the year in question. You will be expected to repay any remaining debt in full. If your request is refused, you can appeal.

How do I deal with income tax debt?

Start by working out how much you can afford to pay towards your income tax debt. We can help you do this.

Make sure you tell HMRC about your situation, and make the first payment as soon as you can. This will give them confidence that you are committed to repaying your debts.

You’ll need to repay your arrears before your next tax bill. Ask HMRC if you need longer to do this.

What happens if I don’t deal with my HMRC debt?

If you don’t make an arrangement to repay your debt, HMRC can take action against you. This might include:

  • sending bailiffs to collect the debt from your business premises – removing stock or assets up to the value of what you owe them.
  • collecting what you owe from your salary
  • applying for a County Court Judgment (CCJ)
  • summonsing you to a magistrate’s hearing if your debt is less than £2,000
  • starting bankruptcy if your debt is greater than £5,000

  • taking money from your bank or building society account if your savings are over £6,000

Get free debt help

If you are self-employed and worried about your finances, or find yourself in the early stages of debt, we may be able to help you find a solution. Running your own business can be lonely, especially when you’re facing money problems – we’re here to support you, by giving you free debt advice and a clear idea of your options. All you need to do is call 0800 280 2816.