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As the cost of living crisis drags on, nearly 200,000 low-earners have been hit with HMRC penalties for failing to file their tax returns. This high figure is a reminder of the scale of confusion that surrounds Self Assessment.

At The Salary Calculator, we’ll walk you through the key information, to help safeguard you against being hit with tax-related fines. Below, we’ll explore and explain:

• How many penalties were issued and why,
• The rules around Self Assessment,
• HMRC’s response and upcoming changes

HMRC issues hundreds of thousands of penalties to low earners

Recent figures have revealed that between 2018 and 2022, HMRC handed out 660,000 fines to earners who didn’t owe any tax. Eleven million people are required to submit a Self Assessment income tax return to document their other sources of income or past income. Missing the submission deadline on 31 January, means people are automatically hit with a £100 penalty.

For the 2020-21 financial year, 184,000 people were fined for failing to complete a Self Assessment tax form by this deadline. These 184,000 taxpayers were paid less than £12,500 a year, meaning they were not subject to income tax. A total of 58000 of the 184,000 low earners who were fined were successful in their appeal, bringing down the total to 126,000.

Thinktank Tax Policy Associates (TPA) obtained the data following a FOI request, and found that 92,000 people among the lowest-paid 10% of the population were fined by HMRC in 2020-2021, while just 39,000 of the highest-paid 10% received fines.

Speaking about this, Dan Neidle, a tax campaigner and founder of TPA, said: “We believe the law and HMRC practice should change. Nobody filing late should be required to pay a penalty that exceeds the tax they owe.”

“People are falling into debt and, in one case we’re aware of, becoming homeless as a result of HMRC penalties. Advisers working with low-income taxpayers see this kind of situation all the time, and filing appeals for late-payment penalties often makes up a significant amount of their work.”

What are the rules and penalty charges?

So, what are the rules around Self Assessment that you need to adhere to in order to avoid being hit with penalties?

If, in the last tax year, any of the following applied, you must file a tax return:

• You were self-employed as a ‘sole trader’ and earned over £1,000 (prior to deducting anything you can claim tax relief on)
• You are a partner in a partnership business;
• You are a minister of religion;
• You are a trustee or the executor of an estate.

There are some other circumstances where you might also need to file a Self Assessment Tax Return. You can find out more about that here.

It is important that you register with HMRC for Self Assessment by 5 October, following the end of the tax year in which the income or gains first arose. If you fail to do this, you may be subject to penalties. This deadline is extended to 31 October for paper returns.

Other key dates include 31 January, which is the deadline for both submitting your online tax return and paying the tax that you owe.

The second payment on account is due 31 July 2023, and by January, if you still owe HMRC tax following your payment on account, you’ll need to pay a balancing payment.

If you miss the submission deadline, you will be hit with an automatic £100 automatic late-filing penalty.

If you fail to pay this for three months, the penalty can begin to increase by £10 each day, up to a maximum of £900 for 90 days.

At six months, a flat £300 additional penalty can be applied, or 5% of the tax due, whichever is higher, and if after 12 months you’ve not paid, you can incur another £300 penalty.

What was HMRC’s response and are there incoming changes?

Following a wave of criticism, an HMRC spokesperson released the following statement: “The government has recognised that taxpayers who occasionally miss the filing deadline should not face financial penalties, and has already announced reform of the system.”

So what reforms are set to be introduced? From 2026 onwards, the current standard £100 fine for late filing of Self Assessment tax returns will change to a points-based system.

According to HMRC, this will mean that those who make an occasional mistake won’t be hit with big fines straight away. Instead, those who miss the filing deadlines will be given a point, and a financial penalty will only be charged to them when a set number of points is reached.

The Government policy paper outlines that taxpayers will receive a point every time they miss a submission deadline, and HMRC will notify them when they receive a point.

When they reach a particular threshold of points, determined by how often they’re required to submit, a financial penalty of £200 will be charged, and they will be notified.

These thresholds are as follows:

• Annual – 2 points
• Quarterly (including MTD for ITSA) – 4 points
• Monthly – 5 points

As per these new rules, another £200 penalty will be issued for every subsequent late submission, but the taxpayer’s points total will not increase.

However, despite calls to reform the system further, the spokesperson said deadlines for returns are “necessary for the efficient functioning of the tax system,” adding: “We strongly encourage anyone who does not need to file a return to tell HMRC.”

“Our aim is to support all taxpayers, regardless of income, to get their tax right, and details of what to do if a person no longer needs to file a return are included in reminder letters every year.”

There are also further upcoming changes to Self Assessment, too. From April 2026, those who file Self Assessment reports each year and are self-employed, with annual gross income of over £50,000, will have to comply with the government’s new Making Tax Digital (MTD) for Income Tax rules. As per these rules, these taxpayers will have to keep records in a digital format, using specific accounting software packages or apps or maintain spreadsheets for recording business transactions.

Further, instead of a yearly report, people will be required to submit quarterly updates to HMRC. The deadlines for this will be as follows:

• 6 April to 5 July
• 6 July to 5 October
• 6 October to 5 January
• 6 January to 5 April

In addition to the quarterly returns, this will conclude with submitting an ‘end-of-period statement’ to confirm the final taxable profit for the accounting period.

From April 2027, those who file a Self Assessment tax return and are self employed, with an annual gross income of between £30,000 and £50,000 will be required to do the same.