Realising that you have not declared some income can be worrying. You may be thinking about the amount of tax you owe, whether you will receive a penalty or what HMRC might do if they find out first. The important thing is not to panic or ignore the problem. If you know that you have taxable income that was not reported, dealing with it early is usually a better option than waiting for HMRC to contact you.

Undeclared income can happen for different reasons. You may have started renting out a property, earned money from freelance work, received foreign income or simply misunderstood what needed to be included on your tax return. Whatever the reason, there are steps you can take to get a clearer picture of the situation before deciding how to correct it.

9 Steps to Take Before HMRC Reaches Out to You for Not Declaring Income

1. Work Out Exactly What Income Was Missed

Start by finding out what you actually failed to declare. Do not try to guess the amount from memory. Go through your bank statements, invoices, payslips, rental records, investment statements and other relevant documents to work out what you received and when.

You also need to look at the tax years involved. One missed payment from the current tax year is different from income that has gone undeclared for several years. HMRC has different rules depending on the type of income and your circumstances, so getting the dates right is an important first step.

If you are already registered for Self Assessment and have missed income from a previous return, you may need to correct that return. If you do not normally complete a tax return, you may need to register and report the income. HMRC says you should tell them as soon as possible if you have income or gains on which tax is due but which you have not declared.

2. Do Not Delete or Ignore Your Records

It can be tempting to avoid looking at old paperwork when you realise there is a problem. Do the opposite. Gather everything you can find, even if you think some of it will not be needed.

Look for:

1. Bank statements
2. Invoices and sales records
3. Rental income statements
4. Receipts for relevant expenses
5. Investment and dividend statements
6. Previous tax returns
7. PAYE records
8. Details of overseas income or assets, if relevant

You may not have every document, particularly if the income dates back several years. That does not mean you should give up. Start with what you have and make a note of anything missing. HMRC’s guidance recognises that older records can sometimes be difficult to obtain, but you should still make a reasonable effort to establish the facts.

3. Check Whether You Actually Owe Tax

Not every amount of money you receive automatically means you owe additional tax. Before assuming you have a large tax bill, work out what type of income it was and how it should have been treated.

For example, rental income, self-employed income, savings interest, dividends and capital gains can all have different rules. You may also have allowable expenses, allowances or reliefs that affect the amount on which tax is calculated.

This is why it is important to establish the actual taxable amount rather than simply adding up everything that came into your bank account. A mistake at this stage could leave you reporting the wrong figure to HMRC.

4. Find Out Which Tax Years Are Affected

Once you know what income was missed, go back through each affected tax year. Make a simple list showing the year, type of income, amount received and any relevant expenses or deductions.

This can make a complicated situation much easier to understand. You may find that only one year needs correcting, or you may discover that the same income was missed over several years.

HMRC has a service for individuals to disclose income or gains that were not declared in previous tax years. Depending on your circumstances, there may be another route that is more appropriate, so do not assume the same process applies to every case.

5. Work Out the Tax, Interest and Possible Penalties

Finding the undeclared income is only part of the job. You also need to understand what you may owe. This can include the unpaid tax, interest and potentially a penalty.

Interest is generally charged from the date the tax was due until it is paid. Penalties can depend on why the income was not declared, how long it remained undeclared and whether the disclosure is made voluntarily or after HMRC has started looking into the matter.

Do not assume that a penalty is automatically the maximum amount. HMRC considers the circumstances and the quality of the disclosure. Being open, providing the relevant information and cooperating can affect the penalty position.

6. Consider Making a Voluntary Disclosure

If you know you have unpaid tax and HMRC has not contacted you about it, you may be able to make a voluntary disclosure. The exact process depends on what tax is involved and the circumstances of your case.

For certain disclosures, HMRC’s process involves notifying them that you intend to make a disclosure, providing details of the previously undeclared income or gains, making a formal offer and paying what you owe. HMRC may then ask for further information if it needs to check the figures.

The important thing is to understand the process before sending information. A disclosure needs to be complete and accurate. If you leave out important information, you may create more questions and further work later.

7. Get Professional Advice Before You Submit Anything

If the situation involves several years, large amounts, property, overseas income or complicated records, it can be difficult to know exactly what to tell HMRC and how to calculate the figures. Speaking to a professional does not mean you are admitting to deliberate wrongdoing. It simply gives you someone who understands the tax rules and can help you work through the facts before you make a disclosure.

This can be especially useful if you are unsure whether you need to amend a previous return, register for Self Assessment or use a particular disclosure route. HMRC’s own guidance confirms that taxpayers have the right to seek help from a professional adviser when considering penalties connected with a disclosure. If you are based in Edinburgh, getting advice from someone familiar with HMRC disclosure Edinburgh can also make it easier to discuss your situation locally and understand what information you need to prepare.

8. Do Not Wait Because You Cannot Pay the Full Amount

One reason people leave undeclared income alone is that they are worried they cannot afford the tax bill. Ignoring it will not make the liability disappear. In fact, interest can continue to build while the tax remains unpaid.

First, find out what you actually owe. Once you know the figure, you can look at your payment options and whether you need to discuss your circumstances with HMRC. It is much easier to deal with a known amount than to keep putting the problem off because you are worried about what the final figure might be.

9. Be Completely Honest About What Happened

When you correct your tax affairs, explain the situation honestly. If you made a genuine mistake, say so. If you misunderstood the rules, explain that. If there was another reason the income was not declared, give the relevant facts.

Do not try to make the problem look smaller by leaving out income or changing figures to reduce the bill. HMRC considers the timing, nature and extent of a disclosure when assessing the quality of the information provided. A full and accurate disclosure gives HMRC a much clearer picture of what happened.

Deal With It Before It Grows

Finding undeclared income can be uncomfortable, but ignoring it is unlikely to make things easier. If the situation is complicated, get professional help before contacting HMRC. Once you understand the position, you can take the right steps to put your tax affairs back in order.