When you submit your tax return at the end of the financial year, you have to tell HMRC about all the income you’ve received from all sources – including self-employment, property, capital gains, and so on. This is so HMRC knows how much to tax you.
“Undeclared income” is any source of money that, for whatever reason, you do not disclose to HMRC.
There are many reasons why you might not to declare a source of income on your tax return. Maybe you simply didn’t realise that you needed to tell HMRC about a certain source of money. Or perhaps you weren’t sure just how to declare a source of income. Or maybe you were worried that you wouldn’t be able to pay the tax on your income.
What Are The Penalties For Not Disclosing Income to HMRC?
If HMRC finds out you have not declared a source of taxable income, then they’re going to make you pay. They may charge you some interest and penalties on top of your tax bill. And if it’s a serious case, they may take you to court, so you may end up in prison.
But in every case, you will have to pay the tax on that income.
HMRC will go to great lengths to collect any tax you owe. But they’re not totally unreasonable. The earlier you contact HMRC to tell them about the income, the more lenient they’re likely to be.
You can read a guide to telling HMRC about undeclared income for more information. This guide also specifies the sort of taxable income that you don’t have to tell HMRC about.
But How Does HMRC Know About Undeclared Income?
HMRC has a very powerful system called Connect. It monitors multiple pieces of data in real-time, so it’s able to tell when your declared income doesn’t match up with your lifestyle. If they sense that you’re spending more than you appear to be earning, then it may suspect you of tax fraud. This could trigger a HMRC investigation.
On top of this, HMRC is committed to constantly searching for undeclared or under-declared income. Many things can trigger an investigation. For more information, you can read our guide to what might trigger an HMRC investigation.
What Happens If You Don’t Tell HMRC About All Your Income?
You might think it’s best to simply keep quiet about a certain source of income. But trust us – it’s really not worth the risk. There’s every chance that HMRC will find out about your undeclared income sooner or later. And with the interest and penalties, you may end up paying a much bigger tax bill than you would have had you simply declared the income in the first place.
Worse, HMRC investigations can prove immensely costly for self-employed workers and small businesses. And if HMRC decides to prosecute, you may also have to worry about your legal fees.
But HMRC may be more lenient if you approach them first, rather than waiting for them to approach you. So once more, take a look at their guide to paying tax on undeclared income.
And for extra peace of mind, consider taking out insurance to cover your legal fees in the event of a tax investigation. We specialise in bespoke insurance packages for self-employed workers, specifically designed to meet your unique needs. We offer legal expense insurance as an add-on to our self-employed professional indemnity insurance policies. You can get all the cover you need for as little as 35p a day, with no hidden fees.
If you’ve got any questions about insurance for self-employed freelancers and contractors, please contact the Tapoly team at email@example.com, call our helpline on +44(0)2078 460 108 or try our chat on our website.