Screenshot of an article headline and lead photo from The Observer, dated 26 October 2024: The Observer Tax Thousands are fined by HMRC even though they don’t owe any UK tax Campaigners call for reform after more than 83,000 low earners are hit by HMRC penalties Michael Savage and Raphael Boyd Sat 26 Oct 2024 16.00 BST Share [Text on envelopes in photo]: HM Revenue & Customs HM Revenue & Customs HM Revenue & Customs There are concerns about the extent to which people who are vulnerable or facing financial hardship are being issued with the penalties for failing to submit a self-assessment tax form on time. Photograph: Ascannio/Alamy

How to reform HMRC penalties for people on low incomes

BudgetBudget2024Penalties
29 October 2024

6 Comments

In the last few years, HMRC charged 420,000 people with £100 late filing penalties when they earned too little to pay tax. People earning under £6k received twice as many penalties as people earning more than £83k.

Rachel Reeves should reform the penalties system.

Our previous reporting on the impact of HMRC penalties on people on low incomes is here. As the Observer reported on Sunday, we now have better data, and the first data on the impact of the £300 penalties for filing one year late. It’s as concerning as our previous data on the impact of the £100 penalties.

We’ve been presenting a series of tax reform proposals in the run-up to the Budget. This is the seventh – you can see the complete set here.

The impact of penalties on the poor

This chart shows the percentage of taxpayers in each income decile who were charged a £100 fixed late filing penalty:

Stacked bar chart of the total number of £100 late filing penalties on UK taxpayers in each income decile from 2018/19 to 2021/22: The lowest-income taxpayers receive the highest number of £100 late filing penalties by far, with around 330,000 penalties in the 1st decile compared to under 100,000 in the 7th and 8th deciles. A substantial proportion of penalties fall on individuals in the bottom three deciles whose incomes are below the personal allowance and therefore not subject to income tax. Total number of £100 late filing penalties on taxpayers in each income decile - 2018/19 to 2021/22 TAX POLICY ASSOCIATES Y-axis: Number of Taxpayers (0 to 350,000 in increments of 50,000) X-axis: Income Decile (1st to 10th) Annotation at approximately the 3rd decile: "Personal allowance - incomes under this are not taxed" (indicated with a vertical line) Legend: - Green: Total Penalty appealed - Red: Total Penalty charged Approximate values by decile (Total Penalty charged / Total Penalty appealed / Total): - 1st: 223,000 charged, 108,000 appealed (Total: 331,000) - 2nd: 134,000 charged, 50,000 appealed (Total: 184,000) - 3rd: 107,000 charged, 38,000 appealed (Total: 145,000) - 4th: 91,000 charged, 32,000 appealed (Total: 123,000) - 5th: 84,000 charged, 28,000 appealed (Total: 112,000) - 6th: 76,000 charged, 28,000 appealed (Total: 104,000) - 7th: 71,000 charged, 25,000 appealed (Total: 96,000) - 8th: 64,000 charged, 23,000 appealed (Total: 87,000) - 9th: 83,000 charged, 32,000 appealed (Total: 115,000) - 10th: 107,000 charged, 32,000 appealed (Total: 139,000)

The green bars show where penalties were assessed but successfully appealed. The red bars show where the penalty was charged. The black vertical line shows the personal allowance, below which nobody should have any tax liability.

  • There are 420,000 penalties to the left of the black line. That means 420,000 £100 late filing penalties were assessed on people who earned too little to pay tax. Another 150,000 were charged with penalties but successfully appealed.
  • More than twice as many £100 penalties were charged on people in the lowest earning decile (earning less than £6k) than in the highest earning decile (earning more than £83k).

There’s an even more extreme pattern in the £300 penalties for filing a year late: three times as many penalties in the lowest earning decile than the highest earning.

Stacked bar chart showing the total number of £300 late filing penalties charged and appealed by income decile from 2018/19 to 2021/22: Taxpayers in the lowest income decile received by far the highest number of £300 late filing penalties, totalling over 110,000 penalties (around 77,000 charged and 34,000 appealed). In comparison, all other deciles each saw between approximately 19,000 and 43,000 penalties, with the lowest overall count in the 8th decile. Total number of £300 late filing penalties on taxpayers in each income decile - 2018/19 to 2021/22 Logo: TAX POLICY ASSOCIATES Y-axis: Number of Taxpayers (from 0 to 120,000 in increments of 20,000) X-axis: Income Decile (1st, 2nd, 3rd, 4th, 5th, 6th, 7th, 8th, 9th, 10th) Annotation: A vertical line is drawn between the 3rd and 4th deciles labelled "Personal allowance - incomes under this are not taxed". Legend: Green: Total Penalty appealed Red: Total Penalty charged Approximate data values by decile (Total / Charged / Appealed): - 1st: Total ~111,000 (Charged ~77,000; Appealed ~34,000) - 2nd: Total ~43,000 (Charged ~31,000; Appealed ~12,000) - 3rd: Total ~31,000 (Charged ~23,000; Appealed ~8,000) - 4th: Total ~27,000 (Charged ~20,000; Appealed ~7,000) - 5th: Total ~26,000 (Charged ~19,000; Appealed ~7,000) - 6th: Total ~24,000 (Charged ~17,000; Appealed ~7,000) - 7th: Total ~22,000 (Charged ~16,000; Appealed ~6,000) - 8th: Total ~19,000 (Charged ~14,000; Appealed ~5,000) - 9th: Total ~26,000 (Charged ~19,000; Appealed ~7,000) - 10th: Total ~33,000 (Charged ~25,000; Appealed ~8,000)

Every penalty issued to the left of the “personal allowance line” is a policy failure. Those penalties should never have been issued.

The full dataset and bar chart code is here, and there’s more detail on the technical background here.

Why are people on such low incomes being asked to complete a self assessment return?

We don’t know, but likely some mixture of:

  • People with self-employment income (which always requires self assessment),
  • People who had higher income the previous year, and
  • HMRC mistake.

The human impact

Several years of penalties can add up to thousands of pounds – here’s a typical example that was sent to us (digits obscured to preserve privacy):

Screenshot of an HMRC online tax account showing current amounts due for payment across four tax years: Unique Taxpayer Reference (UTR): [redacted] Current position £4,949.[redacted] is due for payment. A breakdown of this amount is outlined in the table below. Follow the appropriate link within the 'Description' column to find out more. Description Amount (£) Tax year ending 05 Apr 2020 1,398.[redacted] Tax year ending 05 Apr 2019 342.[redacted] Tax year ending 05 Apr 2018 1,471.[redacted] Tax year ending 05 Apr 2017 1,735.[redacted] Total 4,949.[redacted] Interest may be charged on late payment of amounts due now.

People are falling into debt, and in one case we’re aware of, actually becoming homeless, as a result of HMRC penalties.

Even just the lowest penalty of £100 is a large proportion of the weekly income of someone on a low income (indeed over 100% of the weekly income for someone in the lowest income decile):

Line chart showing what percentage of weekly income a £100 fixed penalty represents across various levels of gross pre-tax income: A £100 fixed penalty represents almost 100% of weekly income for someone earning around £5,000 per year, falling sharply to around 26% of weekly income at £20,000, approximately 13% at £40,000, and under 5% at £100,000 and above. Title: What % of weekly income is a £100 fixed penalty, for various levels of gross income? (deciles shaded) Logo: TAX POLICY ASSOCIATES Y-axis: % of weekly income (0%, 20%, 40%, 60%, 80%, 100%) X-axis: Pre-tax income (£0, £20k, £40k, £60k, £80k, £100k, £120k) Values indicated by the curve: - Near £5k: ~98% - £10k: ~52% - £20k: ~26% - £30k: ~17% - £40k: ~13% - £60k: ~9% - £80k: ~6.5% - £100k: ~5.2% - £120k: ~4.3% Note: The chart background is shaded into alternating vertical bands representing income deciles.

A respected retired tax tribunal judge has described the current UK penalties regime as the most punitive in the world for people on low incomes.

Since publishing our initial reports, we’ve been inundated with stories from people on low incomes affected by penalties when they had no tax to pay.

These are vulnerable people, at a low point in their lives – and the same difficulties which meant they missed the filing deadline mean they often won’t lodge an appeal, and may take months before they pay the penalties (racking up additional penalties in the meantime). A successful appeal is not a success – it means that someone with limited time and resources has had to navigate what is to many a complex and difficult administrative system.

Here are just two of the many responses we received:

Screenshot of direct messages to Dan regarding HMRC late fees and penalties: Hi Dan, I have given up trying to even sort my tax as it revolves around a rebate they gave me in 1994 I think and then decided 6 months later to ask for it back. Also been self employed for ages but never earned enough to even be taxed and now it about £7k sue to late fees and penalties. I can’t afford any of it and even though I did try and sort it a few times they could never settle on what I actually owed them according to earnings etc. I really don’t know how to solve it now. And can never speak to anyone there with an ounce of compassion or understanding. Cheers, [redacted] Tue 7:24 PM I even wrote to them to say I was no longer working under the business name they have on file but never received anything. I am afraid to say now I have stuck head in sand as my father recently passed away. Tue 7:27 PM
Screenshot of a message regarding HMRC late filing penalties for a partnership tax return: [illegible] I was fined 1200 in 2021 for filing my partnership tax return a day late. Between both of us, we earned no more than 16k that year. 8k each. And we’re fined 1200 EACH for filing a day late. I still haven’t paid it, as I was out of work due to illness for a long time (I’m also disabled, they’re just great aren’t they?) and had no income. But now I’m earning, and I’m earning good money, I know they’ll be asking for it again,do you know if is there anything I can do to squash it???

What should change

Until 2010, nobody could be charged a penalty which exceeded the tax due. If you were issued a late filing penalty, and then submitted a return showing no tax was due, the penalty was cancelled.

The data provides compelling evidence that the law should go back to how it was. We have more detailed recommendations here.

This is one tax reform that should be easy for any Labour Chancellor. The cost is likely negligible; but there would be a real benefit to some of the poorest and most vulnerable in society.

Many thanks to HMRC for their detailed and open response to our FOIA requests on penalties and income levels. And thanks to all the tax professionals who alerted me to this issue – otherwise I never would have been aware of it.

All the data and code for these charts is here.

Footnotes

  1. It’s for the most recent four years for which data is available ↩︎

  2. The top decile income threshold changed a little during this period – see the data here. ↩︎

  3. See Richard Thomas’ comments here ↩︎

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6 responses to “How to reform HMRC penalties for people on low incomes”

  1. Sue avatar
    Sue

    I wonder how many of these penalties were a result of automatic fines crossing with updates from taxpayers sent by mail and delayed being actioned in the HMRC’s reportedly lengthy postal backlog.
    It would be interesting to know if there is a policy to review fines if they have crossed with written correspondence.
    Vulnerable people on low incomes can be among the digitally excluded so it would be valuable to look into this.

    Reply
  2. Claire Aston avatar
    Claire Aston

    Thanks Dan. Instead of reforming penalties HMT decided to hike the interest rate on tax debt to raise money through the back door, which TaxWatch are worried about as its not appealable. We’ve written a short piece on this cross referencing your work here:
    https://www.taxwatchuk.org/interest-and-debt-autumn-budget-2024/

    Reply
  3. Peter F avatar
    Peter F

    There is probably a case for a philosophical reset as to whether the state works for its citizens or if the citizens are subjects of the state. The sheer callousness of this, Carer’s allowance, Windrush, etc, create a mistrust between the government and the governed. All of these policy failures end up costing much more than the amount at issue. Some basic kindness can shift the dial without much cost.

    Thanks for highlighting it Dan.

    Reply
  4. Prof SB avatar
    Prof SB

    Thanks for publicizing this important issue.
    A small typo you might wish to correct: Graph 1 is described in the text as “shows the percentage of taxpayers” but the graph axis (correctly) says this is the _number_ of taxpayers in each decile.

    It might be of interest to note how many taxpayers are in each decile and therefore highlight what percentage of the decile 325,000 ‘taxpayers’ being hit with a penalty even when they owe no tax. (My guess is approximately 5 million; 6% is a significant percentage.)

    Reply
  5. MK avatar
    MK

    Just one further thought perhaps the point as to when a return should be sent should be changed, for example instead of as current –

    You were self-employed as a ‘sole trader’ and earned more than £1,000 (before taking off anything you can claim tax relief on)

    should be changed to you are self-employed and your total taxable income from all sources exceeds your tax threshold.

    (That being said, I don’t know if this would be considered a problem by the DWP re benefits).

    Reply
  6. MK avatar
    MK

    Around 10 years ago when I worked for HMRC, they ran a project which took a lot of people out of SA tax return filing when it appeared a return was no longer required, I believe due to the number not being filed.

    Before that (and I am talking 20 years ago) outstanding tax returns were managed by the local collector of taxes and worked very well .

    Now to the current situation, I reported a client to HMRC (now ex) who had 5 years returns outstanding with penalties, as HMRC had done nothing to chase them up despite the fact we believed he owed about 200K in duties.

    IF HMRC took a pragmatic view a lot of these problems could be solved easily, (for example how much have HMRC written off in the last few years?) however as I say again with HMRC closing all the local offices, taxpayers not being able to see HMRC staff, there is a clear disconnect between the people who work there and their customers.

    Frankly the department is shambolic in so many ways (and I really don’t like saying that considering I put so much in when I was there!)

    Reply

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