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Many people who are unable to pay their tax on time will worry about the potential consequences, but the worst thing is to simply ignore the matter and hope it will just go away. The situation may not be as bad as you think and the golden rule is to act quickly.

If you are in the Pay as You Earn system You should receive a P800 tax calculation if you owe more than £50 in tax. However, it is very important you check that the figures in the calculation are correct. If incorrect, you should contact HMRC immediately giving them the correct information. If correct and before paying HMRC, you should try to understand why you owe the tax. This is important as you may fall into one of the limited categories in which you can argue that you should not have to pay the bill. The underpayment may have arisen because your employer/pension payer didn’t operate PAYE correctly. For example, not applying the tax code that HMRC sent to them. In this case, HMRC should first seek the tax from the employer/pension payer, not from you. Alternatively, it might have arisen because HMRC itself failed to make timely use of information they already hold about you. This is covered by their concession ESC A19. In both cases you can ask HMRC to investigate and suspend collection until a decision is made.

How is the tax collected? Amounts under £3,000 are normally collected through your tax code for the next tax year. If it is not possible to do this or for larger amounts, HMRC will write to you asking for a voluntary payment. If you do not respond, they will issue you a tax return where full payment will be due by 31st January after the end of the tax year, with penalties for late filing and interest and surcharges being added for late payments.

If you are already in the self- assessment system – Contact HMRC immediately if you disagree with the amount of tax shown on your Statement of Account or tax demand. There could be a simple error which a phone call could resolve.

If you cannot afford to pay (PAYE or SA) – If the tax owed is correct, and you cannot afford to pay in one go, HMRC might agree to make a ‘Time to Pay’ arrangement with you, possibly spreading payments over five years. However, you may have to show that you cannot afford to pay for periods over three years. HMRC will always aim to collect the debt from you as quickly as is reasonably possible and any tax paid late will attract interest. But if you make a ‘Time to Pay’ arrangement before the tax is due and you stick to it, HMRC should not charge you penalties for late payment.

HMRC often use Debt Collection Agencies which are listed on HMRC’s website. They have broadly the same collection powers, but will not have any understanding of how the debt has arisen. Any queries should be raised directly with HMRC. Debt Collection Agencies are authorised to contact taxpayers by phone and letter, but not to carry out personal visits. If they fail to collect the tax they should refer the case back to HMRC.

If your circumstances mean that you will never be able to pay the debt, for example, you are retired and on pension credit, HMRC may agree to write off the debt under hardship. If, however, you own your property they will want paying eventually, but might allow the debt to be paid from your estate when you die.