Self Assessment penalties: How to avoid them and what to do if you file late

You’re responsible for your own taxes as a small business or self-employed professional. That means understanding which taxes and rules apply to you, keeping thorough records and reporting and paying your taxes accurately. 

That’s a lot to juggle alongside running your business. Take care to stay on top of your finances, or you may face some costly consequences in the form of Self Assessment penalties.

Penalties can be expensive and cause unnecessary stress. Large or numerous penalties can ultimately lead to serious issues with cash flow. Your best bet is to understand and avoid them. (If you do get hit with a penalty, there’s no need to panic. You may be able to appeal it.)

To effectively manage your financial concerns, you need to understand the potential penalties you face. In this article, we’ll talk about why you might get penalised and what it could cost you. We’ll also share how you can avoid penalties and what you can do to dispute a penalty.

Top Tip: Before we dive into the details of penalties, it may be helpful to review the ins and outs of small business taxes. Learn how they work and what taxes apply to your business in our guide to small business tax ⚡️

Table of Contents

• What are the potential Self Assessment penalties?
• How to avoid penalties
• How to dispute a penalty
• Expert insights
• Wrapping up

What are the potential Self Assessment penalties?

HMRC is cracking down on tax non-compliance. In the 2019-2020 tax year, HMRC secured 94.7% of all tax due, including tax accrued through investigations. Missing deadlines or making errors in filing your Self Assessment tax return can cost you big, regardless of what you may owe in taxes. 

So, how do you avoid them? And what happens if you file late? Let’s take a look at why you might get penalised and the costs you could incur. 

Top Tip: Your best strategies for avoiding penalties are knowing how and when to file your Self Assessment tax return and paying any outstanding tax on time. To make sure you’re covering all your bases, read our complete guide to Self Assessment tax returns 💡

Late filing penalties

You will be penalised for filing your Self Assessment tax return late, even if you don’t owe any tax. To prevent incurring extra expenses, you need to know the deadlines for filing and paying. They include:

• 31st October—filing deadline for paper tax returns 
• 31st January—filing deadline for online tax returns
• 31st January—deadline for paying the tax you owe

The penalties for filing late depend on how delayed you are and whether you owe tax. The table below outlines the costs.

Learn more about late filing penalties on GOV.UK.

Late payment penalties

Penalties for late payment only apply if you owe tax. If you miss the deadline for paying your tax liabilities, HMRC will charge you interest on the amount due. The charge is automatic and begins accruing as soon as you miss the deadline. 

Charges are applied at 30 days, 6 months and 12 months after the tax payment due date. The table below shows the costs and when they’re accrued.

Learn more about late payment penalties on GOV.UK.

Penalties for errors in Self Assessment tax return

HMRC may penalise you for errors on returns or other paperwork that misstate or underestimate what you owe in taxes. You can also be penalised if you receive an incorrect assessment from HMRC and fail to correct the error with them.

The penalty incurred depends on the type of behaviour cited and the assessment of taxpayer culpability. HMRC sorts behaviours they consider into the following categories: 

1. Genuine error. You took reasonable care to correctly report your income and taxes (for example, if you submitted the wrong form but filled it out correctly).
2. Error due to negligence. A mistake resulted from failure to take reasonable care to report or pay taxes.
3. Deliberate errors. You made a mistake on purpose but did not attempt to hide it.
4. Concealed deliberate error. You made a deliberate error and made arrangements to conceal the mistake.

Charges also depend on whether you come forward to disclose the error yourself.

• Unprompted disclosure means you communicate the errors before HMRC send you a penalty notice or start an enquiry into your records.
• Prompted disclosure means HMRC has started an enquiry into your records and contacted you about an error.

Once they determine behaviour and culpability, HMRC calculates costs as a percentage of potential lost revenue (PLR) or the amount of tax you still need to pay once the error has been corrected. The table below outlines the range of errors and the penalties. 

Learn more about filing error penalties on GOV.UK.

Failure to notify or register penalties

Finally, HMRC may penalise you for failing to register for Self Assessment or to notify HMRC of any changes that affect your tax liability.

If you’re eligible to register for Self Assessment, you must do so by the assigned deadline (currently 5th October). 

Top Tip: To successfully submit a Self Assessment tax return, you first need to register. Learn the ins and outs of when and how to register by reading our guide to Self Assessment registration ⚖️

If you fail to notify HMRC about anything affecting what you owe in taxes, you can be hit with what’s called a “failure to notify” tax penalty. This applies to things like a new source of income that’s subject to tax or any capital gains you realise during the tax year (including offshore). 

As with errors, failure to notify penalties take into account potential lost revenue. And the fines depend on whether your disclosure of the information is prompted or unprompted. The following table outlines the costs of failure to notify penalties.

Learn more about failure to notify penalties at GOV.UK.

How to avoid penalties

The best way to manage the strain of penalties on your small business is to prevent them altogether. Here are four tips for avoiding penalties. 

1. Know your deadlines

You need to know all the deadlines you’re accountable for when it comes to your Self Assessment tax return. We’ve mentioned these deadlines before, but here are some important dates for your calendar: 

• 5 October—Register for Self Assessment
• 31 October—File paper tax return
• 31 January—File online tax return 
• 31 January—Pay your tax bill

Note that HMRC holds you responsible for missing deadlines even if you’ve delegated your taxes to an accountant. So, keep your eye on your progress. Know where your return and payments are at all times, even if they’re out of your hands.

Top Tip: While you’re ultimately accountable for your company’s finances, an accountant or bookkeeper can significantly help you manage them. If you’re contemplating working with a finance expert, learn what each does and which is best for your business in our guide to understanding accountants and bookkeepers ✅

2. Keep up your tax records throughout the year 

To make sure your returns are on time and error free, you should be updating the info you’ll need all year. Work along the way will help you avoid a last-minute rush when tax is due. 

It’s important to update your records of income and payments regularly. You should also compile the paperwork you’ll need so you know exactly what to reach for when it’s time to submit your return. The documents you’ll want to have on hand include:

• Bank statements 
• P60 or any other records of income you’ve already paid taxes on (if you’re also employed)
• Invoices you issued
• Records of expenses relating to your small business or self-employment
• Receipts of charitable contributions 
• Records of pensions 

3. Report all income

Avoid incomplete returns by reporting all your income for the tax year. That includes all the earnings from your business and any you may accrue outside of it. Sources may include:

• Income you invoiced clients or customers for during the year 
• Salary from other jobs covered by PAYE
• Dividends
• Bank interest (excluding tax-free accounts or your business account)
• Rental property income
• Income from a State Pension or private pensions

In addition, you can reduce your Self Assessment tax bill if you properly report allowable expenses and donations that qualify for tax relief. 

Top Tip: Once you report all your income, you can minimise your tax bill by documenting your allowable expenses. Learn about the different types of expenses and which you can claim as a small business or self-employed person in our guide to Self Assessment expenses  🔑

4. If payment will be difficult, set up a Time to Pay arrangement 

If you know you’re going to have trouble paying, you can avoid penalties or have them suspended by entering a Time to Pay arrangement. This is an agreement with HMRC that allows you to defer payment due to financial hardship. You can set up a monthly payment plan to get a little financial breathing room. 

Your monthly tax bill will include interest on what’s owed, but you won’t incur the fines for late payment. (It will cost you more to settle your bill over time, so it’s best to pay on time if you can.)

If you know you won’t be able to pay your tax bill, contact HMRC right away and see if you can set up an agreement. Your personal situation will determine the details of the arrangement. You’ll fill out an income and expenditure assessment to help HMRC determine how much you’ll pay in each instalment and how long it will take to pay off your debt.

You do need to complete your return before you can qualify for Time to Pay. So don’t leave it till the last minute if you want to avoid fines.

How to dispute a penalty

If unexpected circumstances prevented you from filing or paying on time, or they created discrepancies in your return, you may have the option to appeal the penalty. Here’s how.

When you can appeal a penalty 

You can appeal a penalty when you can provide a good reason for it. HMRC knows that unexpected situations sometimes happen to throw off your financial trajectory. So they’ve detailed what they consider reasonable excuses that allow you to contest a penalty. 

Examples of reasonable excuses include:

• Accounting software failure just before the deadline (as long as you can also show you did sufficient maintenance)
• Technical problems on HMRC’s side
• Death of a close relative or partner shortly before the tax return or payment deadline 
• Unexpected hospital stay 
• Severe or life-threatening illness
• Extreme events out of your control like fire, flood or theft 
• Disability 

The appeal process

To appeal a penalty, you must have filed your return (or have contacted HMRC to let them know you don’t need to complete one). If you receive a penalty letter from HMRC, you can appeal using the form that came with it. Otherwise, you can appeal online.

In either case, you’ll need to provide the following information:

• The penalty’s issuance date
• Your Self Assessment tax return filing date
• The specifics of your reasonable excuse for late filing or payment

Once you submit your appeal, an HMRC officer not involved in the original penalty will investigate it. The investigation will usually take 45 days. In the meantime, you don’t need to pay the fines and won’t face any further penalties until the appeal has been settled.

HMRC will write and let you know the results of the review. If they accept your appeal, you can disregard the original penalty. However, if it’s rejected, you must pay any fines and interest.

What if I disagree with the outcome?

If HMRC rejects your appeal, but you still think the penalty was issued in error or shouldn’t apply to you, you can make a second appeal. You have two options at this point:

1. You can submit the appeal to the tax tribunal—an independent organisation that will review evidence from you and HMRC and come to its own decision.
2. You can opt for alternative dispute resolution. 

Appeal to the tax tribunal

This option involves a hearing where you present your case. To take your case to the tribunal, you must submit it within 30 days of the appeal review decision.

You can appeal online through GOV.UK, and you’ll need to provide information that will help the judge understand the argument from your perspective, including:

• A copy of your original notice or review conclusion letter
• Details about your reasons for appealing

Once you’ve presented your case, the tribunal has a reasonable amount of time to offer a decision—generally 28 days. 

Alternative dispute resolution

Alternatively, if your tax appeal didn’t succeed through HMRC, you can apply for alternative dispute resolution (ADR). In ADR, you avoid a court hearing by having an impartial third party mediate between you and HMRC. 

You may turn to ADR when you want to understand why HMRC dismissed the evidence you submitted or if you think there’s been a misunderstanding. 

Similarly, you can apply if there’s a dispute about the facts or when you think HMRC may not have all the information they need to make a proper ruling. 

ADR can help restore communication between the two parties or help them focus on areas that still need to be addressed. You, or your agent or tax advisor, can use an online form to apply. Then HMRC will let you know if ADR is the best approach to your dispute within 30 days.

Please note: You cannot use ADR if you’re appealing ​​automatic late filing or payment penalties.

💡 Expert insights

Insights author: Dan Hogan, Co-Founder and COO at Ember, who make it simple for everyone to launch, operate and grow a business by automating the tax and accounting, allowing business owners to do just business. Ember takes a tax-first approach to finances, meaning business owners can easily see how much tax they’re paying, automatically optimise it and send it off to HMRC in a few simple steps without needing to hire an expensive accountant.

Can small business owners appeal late filing penalties in times of crisis?

If a small business owner fails to file their Self Assessment on time, HMRC expects the owner to have what they classify as a “reasonable excuse” for failing to submit before the deadline. Examples of what is considered a “reasonable excuse” include traumatic life events, a death of a close family member, or a fire or flood damaging records or software needed to submit the files.

The best thing to do in this situation is to get in touch with HMRC as soon as possible. From there, you can appeal the fine by filling out a form explaining why you didn’t submit the tax return on time. If HMRC is happy with your reasoning, the fine can be reduced, or even dropped.

What happens if a business cannot afford to pay a self assessment penalty?

As soon as you’re aware that you won’t be able to pay the Self Assessment penalty in full, we recommend getting in contact with HMRC immediately. Chances are that if you get in touch with them as soon as the penalty is issued, HMRC will set up a payment plan that allows you to pay off your Self Assessment in stages.

It’s important to note that penalties accrue interest, which is why letting HMRC know you’re having trouble paying the penalty in full as soon as possible is paramount. By letting them know early enough, it’s likely they’ll waive any interest, meaning you’ll only have to focus on repaying the penalty alone.

However, in extreme cases where business owners are unable to repay their debts, HMRC is within their rights to claim possessions to repay the debt. If you are a sole trader, this means that your personal possessions are likely to be claimed, whereas if you operate as a limited company, any assets the company owns—such as laptops or advanced technical equipment—will be claimed.

Wrapping up

Maintaining good control of your tax accounting is crucial to running a successful company. It also ensures you’ll avoid any unnecessary penalties and costs.

Make your life easier by opening a free business bank account. With our easy-to-use accounting software, you’ll eliminate risks of error and keep your business running smoothly.

Photo by Pavel Danilyuk, published on Pexels