What happens if I can’t pay my tax bill?

Mouthy Money Your Questions Answered panelist Sarah Coles answers a reader’s question about what they can do if they can’t afford to pay their tax bill. 

Question: I lost my job at the end of last year and now don’t have enough money to pay off my tax bill at the end of January. What can I do? 

Answer: If you’ve been putting off doing your self-assessment tax return because you can’t afford to pay your bill, the best approach is to consider it as two entirely separate things.

First, you need to do the paperwork, or you’ll face a penalty for missing the deadline of 31 January, and even if you can’t afford to cover your bill in time, there’s no need to fork out for admin delays.

If you can’t pay on time, and you don’t do anything about it, you’ll also pay a penalty – which will rise as time goes on. Don’t be tempted to ignore it, because it won’t go away, and the consequences will get worse.

If you’re not engaging with the taxman at all, they have the power to take some pretty drastic steps. They can pass the debt to a debt collection agency, take money direct from wages or benefits, take you to court, and even make you bankrupt.

If you live in England, Wales or Northern Ireland they can take money directly from your bank and take your belongings and sell them – which can add substantial costs to your debt.

However, if you do the tax return on time, and set up a payment plan, although you’ll pay interest on outstanding tax, there won’t be any more penalties or other horrible consequences.

These payment plans are officially called ‘time to pay arrangements’ and allow you pay in instalments.

You may be able to set one up simply online (on the HMRC website) as long as you owe less than £30,000, are within 60 days of the payment deadline, aim to pay the debt over the next 12 months, and don’t have any other payment plans or debts with HMRC. 

To do this, you’ll need your bank account details and your unique tax reference number (sometimes called a UTR). You will have been given this when you first registered as self-employed, and it will be on previous returns. You can also find it on your online HMRC account.

If you fall foul of any of these restrictions, it’s more complicated, but don’t let this put you off, because there’s still a very good chance you can sort something out.

You’ll need to call the self-assessment payment helpline on 0300 200 3822. They’ll take you through a more in-depth process, so you’ll need to prepare for the call.

They’ll start by checking you can’t pay in full, and they’ll ask if you can make a payment towards the total debt.

You’ll also need to give details about any other savings or investments, (excluding pensions) and will expect you to use this to cut your debt as much as possible. Then they’ll work out what you can afford each month.

You’ll be asked details about what you earn (including any income from pensions), how much you usually spend, and whether there are other taxes you need to pay.

The amount they’ll expect you to hand over is usually around half of what you have left over after you’ve covered all other outgoings including rent or mortgage payments, food, utility bills and any fixed outgoings.

The repayment schedule will be based on what you owe and what you can afford to repay – there’s no time limit on how long it can run for.  

Once the play is set up, you will be able to talk to HMRC and if you’re not happy with the repayment schedule, you can ask them to tweak it.

You can pay also make overpayments if you are able to and this will clear the debt faster.

The full process can be stressful, so it can help enormously to contact a debt charity like Stepchange or Citizens Advice. They should be able to help you understand your overall financial position, and deal with any other debts.

They can also go through the process of working out what debt repayments you can cover, which puts you in a better position when you contact HMRC. They’ll help you produce a ‘standard financial statement’, which the taxman will accept as proof of what you can afford.

However, don’t assume it’s definitely going to be a nightmare. In most cases if you follow all the steps you can set a repayment plan up quickly online, or with a slightly longer phone call to the tax office.

HMRC is aware of the cost-of-living crisis and how people are struggling and ultimately they want the tax to be paid, so there’s no point in putting it off or delaying getting it sorted.

Sarah is an analyst at Hargreaves Lansdown

Sarah has been an analyst with Hargreaves Lansdown for the past five years, after spending 14 years as a financial journalist writing for publications ranging from Bloomberg to AOL Money. Her areas of expertise include savings and financial planning – covering everything from tax to borrowing, spending and the housing market. She is also co-presenter of HL's ‘Switch Your Money On' podcast.

She is passionate about encouraging people to get to grips with every aspect of their finances, not because finance is inherently fascinating to everyone, but so they have enough money for the things that really matter to them in life.

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