Income Tax Debt

All individuals are required to pay tax on their income when it exceeds a certain amount, i.e. your ‘taxable income. Those who are self-employed must submit a Self-Assessment tax form every year, after which HMRC will calculate the tax you owe for the financial year. If you are struggling to pay it is important to act quickly; this is a ‘priority debt’ due to the strong powers held by Her Majesty’s Revenue and Customs (HMRC) to ensure that you pay.

HMRC oversees the administration and collection of all UK income tax. It is not uncommon for companies or individuals to fall behind in their obligations to HMRC. The majority of the UK pay their income tax automatically each month through deductions to their salaries; however, for directors of limited companies or those who are operating as sole traders, the process is different and requires more personal planning.

Income tax debt can accumulate in a number of ways. Some of these include:

  • A lack of forward planning
  • Poor money management skills
  • Not being equipped with proper knowledge on which taxes you will be liable to make payments on.

There are serious consequences for not keeping on top of your debts to HMRC. If you are unable to pay by the deadline and do not make any arrangement to gain more time or agree to make payments in instalments, there will be penalties.

If your payment is late by 30 days, HMRC will charge a 5% (of the existing amount you owe) penalty with an additional 30 day interest charge at a 2.75% APR. If the debt remains unsettled after 6 months, you will be charged the original 5% plus another 5% penalty, as well as 6 months (181 days) worth of interest, still at 2.75% APR.

If you still have not paid – or made any agreement to pay your income tax in a way that is manageable – further action will be taken by HMRC to enforce payment of the debt. These may include:

  • Seizing your possessions to sell at auction, vehicles included (known as ‘distraint’)
  • If your debt exceeds £1000, they may take money out of your bank account directly
  • Pursue court action
  • Force your business to close, or make you bankrupt

Typically these are the actions HMRC will take, in no particular order. HMRC will pursue the route they believe – depending on the size of the debt – to be the most likely to work. HMRC

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