Notifying HMRC

You might not be aware that while HMRC administers the tax system, tax law places the onus on you to tell it if you owe tax that it might not be aware of. Failure to notify will usually result in a penalty added to the tax bill; this is usually between 10% and 100% of the tax owed.

The “failure to notify” penalty can apply to individuals, trustees and executors who owe income tax or capital gains tax for a year and don’t tell HMRC about it by the 5 October following the end of the tax year. Be warned, even if HMRC has told you that you do not need to complete a self-assessment return the penalty can apply.

Exception from penalty

The good news is that a penalty doesn’t apply if all your income (not just the part which causes the tax liability) is one or more of the following:

• subject to PAYE tax, even if not enough tax was deducted for any reason
• included in your tax code (most commonly, benefits in kind, expenses and state pension) because the PAYE regulations allow it
• covered by the dividend nil rate band, i.e. where the total dividend you receive is no more than £500 (2024/25)
• that from which tax has been deducted, e.g. loan interest paid to you by a company.

Usually, for income in the last category tax is deducted by the payer at the basic rate (20%). This means if you’re only liable to tax at the basic or lower rates the exception from a penalty applies. However, If you’re liable to tax at a higher rate meaning you owe tax on top of what has been deducted, a penalty can apply.

Other cases where no penalty applies

Even where you owe tax, you don’t need to notify HMRC where it has, for the year in question:

• asked you to complete a tax return; or
• issued you a so-called simple tax assessment that covers all your taxable income and gains.

Notifying HMRC

Notify HMRC in writing and send your letter by recorded or special delivery. Say why you think the liability has occurred, e.g. you’ve become liable to higher rate tax or you received a source of income or capital gain which HMRC is not aware of. While not strictly necessary, we recommend saying that you’re writing to “notify chargeability in accordance with s.7 Taxes Management Act 1970”.

Missed deadline

If none of the exclusions apply and you miss the 5 October deadline, there’s still a way you can avoid a penalty. Call HMRC as soon as possible (ideally before 31 October 2024), explain the position and ask it to issue you with a self-assessment tax return. You’ll then be covered by the first exception mentioned and so a penalty won’t apply. Even if you miss the deadline by a long way you’re better off notifying HMRC rather than waiting for it to come to you. Being proactive reduces the amount of penalty HMRC will charge.