What penalties apply for not filing Self Assessment and how does HMRC treat undeclared income?

Marek worked full-time as a mechanic for a large transport company. He earned a stable income, had regular hours, and no tax issues. However, on weekends, he supplemented his income by doing minor motorcycle repairs for friends. Nothing major: £50-150 per service, a few such "gigs" a month. "It's just a few quid, nobody will care about that," he thought.

Until he received a letter from HMRC stating... „You must file your Self Assessment tax return. A penalty has been issued.”

The penalty: £100 and a warning that further penalties could be incurred if the matter wasn't resolved. And that's when his real conversation about taxes began.

How did HMRC find out about Marek's income?

In 2025, the tax authority has access to significantly more data than just a few years ago. Platforms, apps, payment intermediaries, and marketplaces transmit income information directly to HMRC.

In Marek's case, his transaction data was digitally fed into the system. When the system detected that the income hadn't been declared anywhere, the matter was automatically forwarded to the Risk & Intelligence Service. This is nothing unusual; it's standard system operation in 2025.

October 5th – an obligation most people don't know about!

Many people think the only important date is January 31st. That's not true, because if in the previous tax year:

• you've never filed Self Assessment before,
• or you were previously registered but didn't have to file a return for 2023/20

then you are obliged to notify HMRC by October 5th that you need to file a return. This is the so-called "notify by 5 October rule.”

Failure to report this obligation means the tax office can impose percentage penalties for failure to notify (i.e., not notifying about the creation of a tax obligation). And this is exactly what happened to Marek.

This is why many people receive letters from HMRC even before the January 31st deadline, because the tax office sees in the system that the October 5th deadline has passed, and the taxpayer has not registered for Self Assessment.

Why excuses don't work

Marek tried to explain that he didn't know he had to register. He thought that with such a small income, it didn't matter. And this is exactly what we hear from most people who come to us with a similar problem.

Clients often tell us:

 "How was I supposed to know? HMRC didn't send anything."

"A friend said it wasn't necessary."

"My work accountant said I didn't earn enough to file."

The problem is that HMRC clearly states what it does not accept as a "reasonable excuse". Officially, the following are not accepted:

• lack of awareness of the obligation
• relying on someone else (accountant/employer)
• lack of a reminder letter
• difficulties with the GOV.UK system
• oversight, heavy workload

In practice, this means one thing: every taxpayer is responsible for themselves!

Penalties for not filing Self Assessment?

In cases like Marek's, there are two separate groups of penalties.

The first is: Penalties for late filing (fixed penalties) 

• 1 day late - £100 (regardless of whether you owe tax).
• 3 months late - £10 per day (up to £900) (this is where the main part of the penalty starts to grow).
• 6 months late - £300 or 5% of the tax due (whichever is higher).
• 12 months late - another £300 or 5% of the tax due (whichever is higher).

The second is: penalties for failure to notify income. This is the second block of penalties, often much larger, and their amount depends on how HMRC assesses your conduct.

• deliberate action - up to 100% of the tax
• deliberate omission, though without intent to conceal - up to 70% of the tax
• careless omission - up to 30% of the tax

In Marek's case, HMRC considered a penalty of 20-30% of the tax for failing to register by October 5th and not filing Self Assessment.

How did we rectify Marek's situation?

When Marek came to our office, we proposed carrying out a TaxDisclosure. This is a special procedure where the taxpayer voluntarily discloses their arrears before HMRC takes action. Such a procedure offers significant benefits, such as lower penalties, no accusations of deliberate concealment, and much better treatment by HMRC. Next, we gathered full documentation: payments, transfers, order history, expenses, parts, tools. We calculated the actual tax and prepared an explanation that Marek did not act premeditatedly, did not intend to conceal income, and cooperated immediately upon receiving the letter. HMRC accepted our arguments, and the penalty was reduced to 20% of the tax instead of the full 30% or more.

What to do if you're in a similar situation?

The most important thing is not to wait. Penalties are automatic. They won't "stop accruing" or "disappear."

It's best not to panic, but to take action. If you've received a letter from HMRC, check which years you have outstanding returns for. From experience, we know that many people have arrears from 2-3 years. The next step is to gather all your income data; you can do this from banking apps, PayPal, Stripe, or even Revolut, and analyze whether you should register as self-employed. If your additional income exceeded £1,000 then you must do it!

File your overdue returns or carry out a Tax Disclosure. This is the best way to limit penalties. And most importantly, do not ignore subsequent letters, as each one becomes more serious. In 2025, HMRC will have access to data from banks, apps, and sales platforms.

Not declaring income is no longer an "oversight" that will go unnoticed. If you have any additional income, remember you must:

• notify HMRC by October 5th,
• submit your Self Assessment by January 31st,
• pay your tax on time.

Failure to notify is one risk. Failure to file Self Assessment is another. Failure to pay - a third.

Therefore, penalties for not filing a return or not paying tax on time can be very high and often amount to significant sums, especially in cases of long delays.

If you have doubts, don't know where to start, or simply don't have the time to go through all the formalities yourself, contact us.

We will review your tax situation, organize your documents, indicate which years require settlement, and prepare the entire process so that your path is simple, organized, and stress-free. At TaxOne we will do it for you quickly, calmly, and in accordance with regulations, so you can rest easy.