What to do about HMRC letters, demands and penalties

Understanding HMRC Communications

HMRC sends various types of communications, and it's important to distinguish between them. These can range from routine reminders to formal demands for payment or penalty notices. Always read the letter carefully to understand the specific issue, the tax year it relates to, and any deadlines mentioned.

Key things to look for:

• Your Unique Taxpayer Reference (UTR): This 10-digit number identifies you for Self Assessment. Ensure it matches your records.
• The tax year: HMRC communications will always specify the tax year (e.g., 2025/26 or 2026/27) the issue relates to.
• The reason for the letter: Is it a reminder, a query, a demand for payment, or a penalty notice?
• Deadlines: Note any dates by which you need to respond or pay.
• Contact details: HMRC will provide ways to contact them if you have questions.

If you're unsure whether a communication is genuine, remember that HMRC will never ask for personal financial details or passwords via unsolicited emails, texts, or calls. You can forward suspicious emails to phishing@hmrc.gov.uk and scam texts to 60599.

Responding to Demands and Penalties

Ignoring HMRC letters can lead to escalating penalties and enforcement action. Your response will depend on the nature of the communication.

If you owe tax

If the letter is a demand for tax you genuinely owe, you should arrange to pay it as soon as possible. HMRC offers several ways to pay your Self Assessment tax bill:

• Online or telephone banking (Faster Payments): This is usually the quickest method, often processed the same day. You'll need HMRC's bank details and your 11-character payment reference (your 10-digit UTR followed by 'K').
• Debit card online: You can pay directly through HMRC's website. There is no fee for debit card payments.
• Direct Debit: If you've set one up previously, this can be a convenient option.
• CHAPS: For same-day bank transfers.
• At your bank or building society: You may need a paying-in slip from HMRC.
• By cheque through the post: Allow at least three working days for this to clear. Make your cheque payable to "HM Revenue & Customs only" followed by your UTR and the letter 'K'.

If you cannot pay your tax bill on time, contact HMRC as soon as possible to discuss a "Time to Pay" arrangement. They may allow you to pay in instalments.

If you've received a penalty

HMRC issues penalties for late filing and late payment of Self Assessment tax. These can accrue quickly.

Late Filing Penalties (for 2025/26 tax year and earlier):

• 1 day late: An automatic £100 penalty, even if no tax is owed.
• 3 months late: Daily penalties of £10 per day for up to 90 days (up to £900).
• 6 months late: A further penalty of 5% of the tax due or £300, whichever is greater.
• 12 months late: Another 5% of the tax due or £300, whichever is greater, plus potential higher penalties for deliberate withholding.

Late Payment Penalties (for 2025/26 tax year and earlier):

• 30 days late: 5% of the tax unpaid.
• 6 months late: A further 5% of the tax unpaid.
• 12 months late: Another 5% of the tax unpaid.
• Interest is also charged on overdue amounts.

Making Tax Digital for Income Tax Self Assessment (MTD for ITSA) Penalties (from April 2026): For those mandated to join MTD for ITSA from April 2026 (broadly, sole traders and landlords with gross income over £50,000 from 2024/25), a new points-based penalty system for late submissions and a revised late payment penalty regime will apply. During the 2026/27 tax year, there will be a "soft landing" period where no penalty points will be issued for late quarterly updates, but late end-of-year submissions and late payments can still incur penalties.

Appealing a Penalty

You can appeal a penalty if you have a "reasonable excuse" for the late filing or payment. You usually have 30 days from the date the penalty was issued to make an appeal.

Examples of reasonable excuses include:

• Serious illness or hospitalisation.
• A recent death of a close family member.
• HMRC system failures.
• Unforeseen events like fire, flood, or theft.
• Postal delays outside your control.
• HMRC errors or wrong advice.

Reasons that are generally not accepted include forgetting the deadline, not having enough money to pay, or misplacing tax records.

To appeal:

1. Review the penalty notice: Understand why it was issued.
2. Gather evidence: Collect any documents that support your reasonable excuse.
3. Submit your appeal: You can often do this online via your HMRC online account or by sending a signed letter to HMRC, explaining your reasons and including your UTR. For some penalties, there might be a specific form like SA370.
4. Await HMRC's response: If your appeal is rejected, you can ask for a review or appeal to the First-tier Tribunal (Tax Chamber).

When you no longer meet Self Assessment criteria

If you've received a Self Assessment letter but believe you no longer need to file a return, you must inform HMRC. For the 2026/27 tax year, you generally need to file if:

• You are self-employed as a sole trader and your gross trading income exceeds £1,000.
• You are a landlord and your gross rental income exceeds £1,000.
• You are a company director (especially if receiving dividends or expenses).
• You have untaxed income of £2,500 or more (e.g., commission, casual earnings, certain benefits).
• Your income from savings, investments, or dividends is above certain allowances (e.g., dividend allowance £500 for 2026/27).
• You need to claim Capital Gains Tax (CGT) (annual exempt amount £3,000 for 2026/27).
• You or your partner receive Child Benefit and either of you earn over £60,000, triggering the High Income Child Benefit Charge.

HMRC has an interactive tool to check if you need to send a Self Assessment tax return. If you no longer meet the criteria, you should contact HMRC to deregister from Self Assessment to avoid receiving further notices and potential penalties.

Common mistakes

• Ignoring letters: This is the biggest mistake, as penalties and interest will continue to accrue.
• Assuming HMRC is wrong without checking: Always verify the details on the letter against your own records.
• Missing appeal deadlines: You typically have only 30 days to appeal a penalty.
• Not keeping records: Good record-keeping is essential for Self Assessment and for supporting any appeals. HMRC requires you to keep records for at least 5 years after the 31 January submission deadline.
• Not informing HMRC of changes: If your circumstances change and you no longer need to file, tell HMRC to avoid unnecessary communications.