UK tax data shows that nearly 400,000 self-employed people on low incomes have been penalised for filing their tax returns late when most of them didn't owe any tax.
Thousands of UK self-employed workers are being penalised for late submission of their tax returns even though they do not earn enough to pay tax, according to the non-profit organisation Tax Policy Associates.
Tax Policy Associates, which is run by tax lawyer Dan Neidle, has analysed tax data provided by HMRC under a Freedom of Information Act request and has found that taxpayers in the lowest three income deciles receive a disproportionate number of penalties compared to those on higher incomes.
It has found that nearly 400,000 people earning less than £13,000 received a penalty for not filing a tax return on time between 2018 and 2020. However, the vast majority of these people had no tax to pay because they earned less than the tax-free personal allowance.
HMRC penalties for late tax returns
A £100 late filing penalty is automatically applied if a self-employed taxpayer misses the tax return deadline. Further penalties are charged after three months.
Some low earning taxpayers have successfully appealed against their penalties but most have had to pay a fine. HMRC said it can cancel a late-filing penalty, "if we accept that a person does not need to send a self-assessment return or that they have a reasonable excuse for filing late".
Dan Neidle told the BBC: "It's astonishing and unjust that hundreds of thousands of people are being charged penalties for late filing of their tax returns, when in fact their income is so low they have no tax to pay.
"I don't think it's right to have a system which puts the onus on people on a low income to fill out forms for HMRC to avoid penalties. What should happen is that if you're late filing, and then it turns out you have no tax to pay, your penalty should be cancelled. That is how it used to work many years ago and I think that's how it should work."
Calls for tax penalties to be scrapped for low earners
Tax Policy Associates is calling for changes to the law and to HMRC practices. It has made the following three recommendations:
- HMRC should start monitoring late submission penalties across income deciles to provide a more complete picture of the impact on the low paid;
- HMRC should change its processes so that those that owe no tax don't have to submit a tax return;
- Fixed rate late submission penalties should be automatically cancelled (and, if paid, refunded) if HMRC later determines that a taxpayer has no taxable income.
According to HMRC, 95% of people pay their tax on time. However, on 24 January, HMRC reported that almost 3.4 million taxpayers had yet to file their online tax returns ahead of the 31 January deadline. More than 12 million people are expected to file self assessment tax returns this year.
The income tax self assessment penalty rules are set to change from 6 April 2025, with a new points system being introduced. It is unclear, at this stage, how this will impact on low earners that haven't filed a tax return.
Written by Rachel Miller.