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Declaring tax – The impact of the hidden economy

Recent research has revealed an increase in the number of individuals earning income through additional streams, commonly referred to as the ‘hidden economy’.

This surge in additional forms of income, from moonlighting to online trading, has led to millions of taxpayers failing to declare additional earnings to HM Revenue & Customs (HMRC).

HMRC’s latest figures highlight the extent of this issue. This data showed that an estimated 8.8 per cent of the UK adult population – equivalent to nearly six million individuals – are involved in the hidden economy, a figure that has nearly doubled since 2016.

While most of this undeclared tax is regarded as low-level, with only 1.1 per cent estimated to have earned over £5,000 of undeclared income, this group alone represents a significant £3.36 billion of tax-free earnings.

Participants in the hidden economy include those who supplement their taxed income with cash work (moonlighters), accounting for 65 per cent of the total and those who do not declare any earnings at all, which represent 35 per cent. Some businesses also contribute to this problem by failing to register for VAT.

While it is clear that some of these activities are deliberate and knowingly entered into, HMRC’s survey suggests that there is also a distinct lack of knowledge about tax obligations.

As an example, 28 per cent of those surveyed believed that if they were already paying tax, they did not need to inform HMRC about any additional forms of income as long as this did not place them into a higher tax band.

For those with more than one source of income, it is vital to declare all earnings to HMRC, regardless of whether this means being pushed into the next tax band or not.

This includes casual work, selling goods or services, rental income, and trading on platforms such as eBay.

Consequences of non-declaration

Non-declaration of additional income can carry significant implications for those involved.

These penalties vary in severity and those found guilty can face anything from a hefty fine to a prison sentence. Individuals need to ensure that they declare any additional income.

How to declare additional income

The Self-Assessment tax return system is available for individuals to declare additional income to HMRC.

This system requires taxpayers to report their income for each tax year, which runs from 6 April one year to 5 April the next, by 31 January of the following year.

Anyone that has only recently started earning additional income has until 5 October following the end of the tax year that they started to receive the additional income to notify HMRC so that they can register for Self-Assessment.

If you are worried that you may have earned additional income and have not declared this to HMRC, our expert tax advisors are on hand to assist.

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