Failure to Notify Penalties: What You Owe When You Declare New Income Late

If you started a new source of income, a side business, a rental, dividends from your own company, and did not tell HMRC in time, the charge you face is not the same as a late-filing penalty. It is a failure to notify penalty, and it is calculated as a percentage of the tax you should have told HMRC about. The good news is that the percentage is largely within your control, and the main lever is whether you come forward before HMRC comes to you.

This piece sits under the Multi-Year Tax Arrears Roadmap pillar and pairs with the procedural guide on the Digital Disclosure Service and the explanation of how HMRC finds undeclared income.

The obligation you may not know you had

When you become chargeable to tax on a new source of income, you have a legal duty to tell HMRC. For most people the deadline is 5 October following the end of the tax year in which the income first arose. So income that first arose in the 2025/26 tax year had to be notified by 5 October 2026. Missing that date is the "failure to notify", and it is what the penalty regime in Schedule 41 of the Finance Act 2008 is built around.

How the penalty is calculated

The penalty is a percentage of the "potential lost revenue", broadly the tax that went unpaid as a result of the failure. The percentage depends on two things: the behaviour behind the failure, and whether your disclosure was prompted or unprompted. The behaviour bands for a domestic (non-offshore) failure are set by HMRC's Compliance Handbook.

Offshore income and gains sit under higher bands again and use a different disclosure route, so the figures above apply to ordinary UK income. Most people who simply did not realise a side income was taxable fall in the non-deliberate band, with a 30% maximum, and that maximum is usually reduced substantially.

Prompted versus unprompted: the lever that matters

A disclosure is unprompted if you make it at a time when you have no reason to believe HMRC has discovered, or is about to discover, the income. It is prompted if you come forward after HMRC has opened a check or you believe it is about to find the problem. The distinction sets the minimum the penalty can fall to.

• Unprompted, non-deliberate, disclosed within 12 months of the tax being due: the penalty can be reduced as low as 0%.
• Unprompted, non-deliberate, disclosed more than 12 months after the tax was due: minimum around 10%.
• Prompted, non-deliberate, within 12 months: minimum around 10%.
• Prompted, non-deliberate, more than 12 months late: minimum around 20%.

The practical reading is stark. The same unpaid tax, the same innocent reason, can carry a penalty anywhere from nothing to 30% depending almost entirely on whether you got to HMRC first. Once HMRC has written to you about the income, the unprompted route is gone.

How the reduction within the band is earned

Within the range for your behaviour and disclosure type, HMRC reduces the penalty according to the quality of your disclosure, measured across three things: telling (admitting the failure and explaining how it happened), helping (working out the figures and quantifying the tax), and giving access (producing records and answering questions). A full, well-prepared disclosure with reconciled figures earns the maximum reduction; a grudging or vague one earns less.

Where a reasonable excuse removes the penalty

A non-deliberate failure to notify can be cancelled entirely if you had a reasonable excuse for it and put the failure right without unreasonable delay once the excuse ended. Reasonable excuse is judged on the specific facts, and a genuine, evidenced reason carries more weight than a general claim of not knowing the rules. The companion guidance on what counts as a reasonable excuse goes into how HMRC reads this.

A worked example

Take someone who began letting a room through a platform in 2024/25, did not realise the income was taxable, and missed the 5 October 2025 notification deadline. The unpaid tax for the year is, say, £1,800. If they come forward voluntarily in 2026 before HMRC contacts them, the disclosure is unprompted and non-deliberate, made within 12 months of the tax falling due on 31 January 2026, so the penalty can be reduced toward 0%. If instead HMRC writes first, having picked the income up through platform reporting, the disclosure becomes prompted, and the same innocent failure now carries a minimum penalty on top of the tax and interest. The income, the reason and the tax are identical; the order of events is what changes the bill.

What to do if this is you

1. 1Work out which tax years the undeclared income covers and the tax involved.
2. 2Get the disclosure in before HMRC contacts you, to protect the unprompted position.
3. 3Use the Digital Disclosure Service or the right disclosure route for your situation, with figures reconciled to what HMRC can already see.
4. 4Set out the behaviour honestly: most ordinary cases are non-deliberate, and saying so with supporting facts keeps you in the lowest band.

Common questions about failure to notify

Is failure to notify the same as a late return?

No. Failure to notify is about not telling HMRC you had a new taxable source in the first place. Late filing is about a return that was issued and not submitted on time. You can face both on the same income, which is why an early disclosure that addresses the notification is valuable.

What if I genuinely did not know the income was taxable?

That puts you in the non-deliberate band, with a 30% maximum that is usually reduced well below that, and potentially to nothing on an unprompted disclosure made within 12 months of the tax falling due. A genuine reasonable excuse can remove the penalty altogether.

Does interest get charged as well?

Yes. Interest runs on the unpaid tax from the date it should have been paid until it is paid, separately from any penalty. Interest is not a penalty and cannot be appealed in the same way, so the sooner the tax is paid the less interest accrues.

Should I wait and hope HMRC does not notice?

That is the most expensive option. HMRC receives data from employers, banks, platforms and overseas authorities, so undeclared income surfaces. Waiting until HMRC makes contact turns an unprompted disclosure into a prompted one and removes the route to the lowest penalty.

Undeclared tax can be a stressful thing to face. If the worry is weighing on you, dealing with it through a proper disclosure is the route that resolves it, and it is worth speaking to a qualified adviser, and to your GP or a support organisation, if the stress is affecting your health.