Most sources of income are taxable and most of them are taxed before you get them. Typically an employer will deduct tax from your earnings before paying you the balance, or sometimes the provider will deduct a “withholding” tax before passing on the remainder to you. In a lot of cases, however, the source of the taxable amount is not immediately known to HMRC until you – or someone else – tell them. You must report this income to HMRC, usually by 5 October following the end of the tax year in which you received it. If you forget or fail to do so, you are committing at best a civil offence and at worst a criminal offence, leaving you open to financial penalties or even imprisonment.
A little bit of income up to £1,000 a year may be earned without tax liability or even having to declare it, say, a few piano lessons or some car boot sales. Anything more substantial such as running a regular business like a Bed and Breakfast, or regular trading on e-Bay must be declared. This is called the Trading Allowance, and you can read more on this here. Forgetfulness when discovered will incur penalties as well as the tax due and at the other end, deliberate evasion will risk prosecution.
Why not keep quiet about my income?
HMRC have a wide range of discovery techniques available. At a simple level, their investigators can read the B & B advert in the village shop window as easily as a genuine holidaymaker. At a higher level, their Connect system can gather a huge amount of information from banks and businesses, as well as from foreign sources through a network of international information exchanges. They also run occasional campaigns targeting particular areas such as fish ‘n chip shops or takeaways.
If you realise that you probably owe some tax, you can approach HMRC voluntarily and offer to pay the arrears. Any penalties are likely to be reduced in these cases, especially if caused by ignorance or carelessness. Waiting until HMRC track you down risks far heavier penalties and an eagle eye on your tax affairs for years. Should you find yourself in this position, you are strongly recommended to seek professional advice.
What to do if you have never declared your income
How to choose an accountant or tax adviser
HMRC has issued guidance on undeclared income. It can be found at https://www.gov.uk/undeclared-income.
