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Income tax debt is the tax you owe to the HMRC on your income. If you fall into arrears on your income tax, it is important to pay it back as soon as possible. Many of us often push this type of debt aside and focus on other debts; however, did you know that income tax arrears are classed as a priority debt?

Failure to do so can result in serious repercussions such as court action, a visit from the bailiffs, and prison.

What is income tax? What should you do if you fall into arrears with your income tax? This guide will explore all the questions you might have about income tax arrears and hopefully offer you some solutions to take charge of your debt problem.

What is income tax debt?

Income tax is taxes you pay when you earn an income. The most obvious one would be the money you have paid through being employed, but there are other things which you pay tax on:

· Profits from being self-employed

· State benefits

· Grants and support payments made to you or your business

· Coronavirus grants and support packages

· Pensions – this can include state, company, and personal ones

· Rental income

· Benefits from your job

· Earning from a Trust

How does the HRMC calculate my income tax?

You must send your income tax return each tax year. Your tax return runs from the 6th to the 5th of April the following year. This gives the HMRC updated information on your employment or business.

It is good practice, especially to put aside a regular amount each month to help pay your income tax bill. It is essential to keep a budget, which will include your personal and business income and outgoings.

What do I do if I get income tax arrears?

If you have fallen behind on paying your tax and you get a letter from the HMRC, it is vital to know what to do if that happens, especially as your income tax is a priority:

1. Don’t ignore your arrears correspondence

Ignoring your income tax arrears, or you could face legal action if you haven’t paid your bill by the 31st of January following the end of the tax year. Your demand letter will include the income tax you owe, the interest that has been charged, along any penalties for overdue payments.

However, even large government organisations can make mistakes or oversights, so it is vital to check for errors and challenge anything you think is wrong. Some of the things you could consider are:

· Did you send your income tax return? Sometimes, if you don’t send it, the HMRC will estimate the tax you owe. The way to contest this is by sending them the correct figures, which could mean a reduction in your income tax bill.

· Did you complete your income tax return correctly? Look through your income tax return and check to see if you might have missed something.

· Have the HMRC processed your payments correctly? Generally, you have a unique identification code that you use to pay the HMRC, and if it is inputted incorrectly when paying your income tax, you may receive a letter as a result. Also, if you have paid through your bank, check to see if you have paid the correct tax office.

· Could the HMRC have sent the demand by mistake? Sometimes this happens, so it is crucial to check that all the details on the demand letter are correct. If there is an error, then contact the HMRC immediately.

· Would you be able to appeal the HMRC demand letter? If you feel you have solid evidence, there could be a possibility of appealing the HMRC. To find out more, visit HMRC appeals.

How do I stop getting into debt with my income tax? 

Getting into debt with the HMRC or the tax office may feel like an overwhelming experience; however, it shouldn’t have to be if you. Take control of this situation by following these steps below to help you get out of debt:

1. Check that the calculations for the HMRC are correct

Even big organisations such as the HMRC can get things wrong, so it is crucial to understand what you owe is the right amount. Make sure the figures for the following are correct:

· Are the figures on your business takings up to date?

· Are all your business expenses in order?

· Is all the information correct on the correspondence they have sent?

Remember, if any of this information is incorrect, this can lead to errors in the calculations and sometimes you might be overpaying.

Once you have an accurate debt figure, the next step would be to put a budget together so you can help clear your debt. Take a look at our handy budget planner for more information as well as consider the following:

1. Income – You will need to work out how much you make each month. If the figure is different each month, work out an average over the 12 months.

2. Outgoings – These are more of your essential outgoings such as your utility bills, mortgage or rent and food.

Please take a look at our tips on how to get the most out of the monthly food budget.

3. Disposable Income – You calculate this by taking your essential outgoings from your income. Whether this amount is a little or a lot, it is the figure you will need to show to the HMRC to settle your debt.

Need more help with debts to do with your business? Check out our helpful business debt guide.

2. Speak to the HMRC

When you have come to a figure you can afford, it is time to speak to the HRMC to devise a suitable payment plan.

Call them on 0300 200 3300. Weekdays – 8 am – 8 pm, and Saturdays 8 am – 4 pm.

The HMRC might ask you for a payment that you can’t afford as they generally like the debt cleared in the financial year rather than rolling it over.

Do not over-commit and get yourself into debt with other creditors. Show the HMRC your budget so they can see that you have tried to calculate your financials responsibly.

It is also vital to stay in touch with the HMRC. If you are struggling with your repayment plan or your circumstances change, it is best to keep the discourse flowing.

What can I do before the HMRC start legal proceeding against me?

Quite often, if you have debts with a credit card company or a loans company, they will usually contact you on many occasions advising you that you need to pay your debt. However, with the HMRC, things happen a lot faster when chasing your arrears.

The situation with the HMRC can intensify quicker, and you could get the debt collection agencies knocking on your door sooner than you think. Therefore you should consider a Time to Pay Arrangement with them.

What is a Time to Pay Arrangement?

Time to Pay Arrangement is a repayment plan you can agree with the HMRC to make plans to repay your income tax debts.

This allows you to spread the costs of what you owe over several affordable payments. A Time to Pay Arrangement is personalised to your situation so, how many repayments you make and how much you make all depends on your circumstances.

You could set up a Time to Pay Arrangement online for your income tax debt. You could do this through the Government Gateway account. However, this can only be done if you have filed your last tax return, you owe less than £30,000, you are within the 60 days payment deadline, and you plan to pay the debt off in the next 12 months.

However, if the above doesn’t apply, you will need to contact the HMRC directly; it would be a good idea to work out a budget. It will show the HMRC that you are serious about paying back the debt.

What will the HMRC do if I ignore the income tax demands?

If you fail to repay your income tax debt, the HMRC has the right to recover the funds. As discussed earlier, the HMRC works differently when you have credit card debt or loan debt. They move a lot quicker to get you to make the payment. Find out below how the HMRC will act to retrieve the debts:

HMRC can apply for a County Court Judgement (CCJ)

The HMRC can apply to the Magistrates Court to put a CCJ out against you. A CCJ can affect your credit rating and put your home and business at risk, so you mustn’t ignore the letter when it arrives through the post.

Find out more about CCJs and CCJs Discharged.

HMRC can apply for a Magistrates Court summons

If you fail to reply to the CCJ demand letter, you will be summoned to attend the Magistrates Court, detailing your business and personal finance. You will be required to agree to a payment plan set for you. This must be adhered to, or it could mean that you would need to make further attendances to Court or even go to prison because of non-compliance.

HMRC can apply for an Attachment of Earnings

If you are employed, then the HMRC has the power to take money directly from your wages before it hits your bank account. If this happens, you need to consider the repercussions on other expenditures and debts.

Similar to a ‘domino effect’, you may not be able to pay your other debts and start incurring late payment charges and interest. However, don’t feel like you are alone. Various debt solutions can help consolidate your debts, like Individual Voluntary Arrangements (IVA) or Debt Consolidation Loans.

HRMC can take money directly from your bank accounts

If you have savings of more than £5,000 in your bank account, then the HMRC can take money directly from there to pay off what is owed to them. If you are in a debt situation where you struggle to make ends meet, it is probably unlikely you will have much savings in your bank accounts. If you do, make it a priority to pay off your debts.

HMRC can start making you bankruptcy

Bankruptcy is always seen as a last resort; however, if the HMRC can start proceedings to make you bankrupt. Bankruptcy will mean that your assets, such as your house, could be sold to pay off your debts.

There are a lot of implications when it comes to bankruptcy. To find out more and how it will impact your life and finances, look at our comprehensive guide on Bankruptcy and Debt.

Can I get my income tax debt written off?

You can apply for something which is called a Request for Special Relief. This is when the HMRC have made errors and not made use of the correct information that has been given to them. The request is called ‘Extra Statutory Concession A19’; however, you need to provide concrete evidence that the income tax affairs were in order.

What help can I get if I have income tax debt?

There is a lot of help available to help you get out of your debt situation. It is crucial to get the right debt advice and find a debt plan that will suit your needs.

Try and do your research beforehand to find the right company to help with your debt situation.

The internet can be an overwhelming place so take a look at our comprehensive guides on various debt solutions available to you.

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