When you file a tax return, you sign a declaration confirming that the information is correct and complete to the best of your knowledge and belief. If it later turns out that the return contains errors or omissions, HMRC has the power to charge a financial penalty on top of any tax that was underpaid.
Many people assume that HMRC penalties only apply when someone deliberately cheats the system. Penalties can also apply to honest mistakes, if HMRC decides you did not take reasonable care when completing your return.
Understanding how the penalty system works means you know what is at stake, why record-keeping matters, and how to protect yourself if a mistake is discovered.
When Penalties Apply
A penalty for an incorrect return can be charged in any of the following situations:
The return understates your tax liability. The return falsely claims a tax repayment that you are not entitled to. The return shows a loss that is inflated or fabricated.
The penalty is calculated as a percentage of what HMRC calls the potential lost revenue (PLR). This is the additional tax that HMRC determines is owed as a result of the error. It is the extra tax due, not the full tax liability on your return.
The Three Categories of Error
The percentage penalty charged depends on the nature of the error. HMRC places errors into one of three categories.
Careless error
A careless error occurs where a taxpayer fails to take reasonable care when completing their return. HMRC describes this as a failure to take the care that a reasonable person in the same position would have taken. Examples include relying on estimates when accurate figures were available, failing to keep adequate records, or misunderstanding a tax rule that you could reasonably have been expected to check.
Deliberate but not concealed error
This applies where a taxpayer knowingly includes incorrect information in their return but does not take active steps to hide it. For example, deliberately recording a transaction incorrectly without creating false supporting documents.
Deliberate and concealed error
The most serious category. This applies where incorrect information was submitted intentionally and steps were taken to disguise or hide the inaccuracy. Creating false invoices, destroying records, or producing misleading documentation all fall into this category.
The Penalty Table
The maximum and minimum penalties for each error type are set out below. All percentages are applied to the potential lost revenue figure. These rates are set by Finance Act 2007, Schedule 24 and are confirmed unchanged for 2025/26 and 2026/27.
Penalty ranges by error type and disclosure * Percentages applied to potential lost revenue (PLR)
| Type of Error | Maximum Penalty | Minimum (unprompted) | Minimum (prompted) |
| Careless | 30% | 0% | 15% |
| Deliberate but not concealed | 70% | 20% | 35% |
| Deliberate and concealed | 100% | 30% | 50% |
Key point on the 0% minimum:
A careless error with a full, timely unprompted disclosure can result in no penalty at all.
The potential lost revenue (the extra tax owed) still becomes payable, with interest, but no additional penalty is charged.
This outcome is only available before HMRC has any reason to believe they have discovered the error.
What Disclosure Means and Why It Matters
Disclosure refers to the act of voluntarily telling HMRC about an error, helping them understand the size of the underpayment, and giving them access to records so they can verify the figures. Making a disclosure reduces the penalty that HMRC can charge.
There are two types of disclosure, and the distinction has a significant impact on the minimum penalty.
Unprompted disclosure
You tell HMRC about the error before you have any reason to believe they have discovered or are about to discover it. This is the most favourable outcome and results in the lowest minimum penalties. A careless error with a full unprompted disclosure can result in no penalty at all.
Prompted disclosure
You disclose the error only after HMRC has indicated they are investigating, or when you have reason to believe they are about to investigate. This still reduces the penalty compared to no disclosure, but the minimum penalty is higher than for unprompted disclosure.
The actual reduction in any penalty also depends on the quality of the disclosure, including how promptly it was made, how much genuine help was provided, and how fully HMRC were given access to records. HMRC has discretion in how it applies reductions within the permitted range.
Worked Example A: Careless Error on Rental Income
Rachel owns several buy-to-let properties and is a higher rate taxpayer (40%).
She files her 2025/26 tax return on 28 January 2027.
The return shows her rental income as £65,000.
During a review, her accountant identifies that due to careless record-keeping,
the correct rental income figure should have been £85,000.
Potential lost revenue (PLR):
(£85,000 minus £65,000) x 40% = £20,000 x 40% = £8,000
The error is careless. Maximum penalty = 30% of PLR:
£8,000 x 30% = £2,400
If Rachel discovers the error herself before HMRC becomes aware, and makes a full unprompted disclosure:
Penalty can be reduced to zero.
If she waits until HMRC opens an enquiry (prompted disclosure):
Minimum penalty = 15% of PLR = £8,000 x 15% = £1,200
In addition to any penalty, Rachel will owe the underpaid tax of £8,000 plus interest on late payment.
Worked Example B: Deliberate and Concealed Error
Derek runs a painting and decorating business.
He submits his 2025/26 tax return on 15 January 2027.
Derek inflated his materials costs by £12,000 and created false purchase receipts to support the claim.
HMRC opens an enquiry into the return.
Realising the enquiry is likely to uncover the inflated costs, Derek contacts HMRC and discloses the error.
Derek has significant rental income and is a higher rate (40%) taxpayer.
He claimed to offset the trading loss against his other income.
Potential lost revenue (PLR):
£12,000 x 40% = £4,800
The error is deliberate and concealed. Maximum penalty = 100% of PLR:
£4,800 x 100% = £4,800
Derek has made a prompted disclosure: he came forward only after HMRC opened an enquiry.
Minimum penalty for deliberate and concealed with prompted disclosure = 50% of PLR:
£4,800 x 50% = £2,400
Derek’s penalty will fall somewhere between £2,400 and £4,800,
depending on the quality and extent of his co-operation.
Penalties for Each Separate Error
If a tax return contains more than one inaccuracy, HMRC will charge a separate penalty for each error. A return that understates three different income sources does not attract one penalty: it attracts three, each calculated on the relevant potential lost revenue.
This means the total penalty exposure can compound quickly in returns where multiple errors exist. It also reinforces why a methodical, record-supported approach to completing returns is so important.
What You Should Do if You Suspect an Error
If you believe your return may contain an inaccuracy, the best course of action is to act quickly and disclose to HMRC voluntarily. Every day between discovering an error and telling HMRC about it is time during which HMRC might open an enquiry, converting your unprompted disclosure opportunity into a prompted one.
Disclosure does not need to be complex. A clear written explanation of the error, the corrected figures, and co-operation with any HMRC queries is usually sufficient. Working with a tax professional at this stage is strongly recommended, as the quality of disclosure directly affects the penalty level HMRC can charge.
Record-keeping is the first line of defence. A taxpayer with organised, accurate records is in a far stronger position to demonstrate that any error was genuinely careless rather than deliberate, and to quantify the correct figures quickly when asked.
Note: these are inaccuracy penalties only.
This article covers penalties for incorrect information in a return (Finance Act 2007, Schedule 24).
Separate penalties apply for late filing and late payment of tax. Those are covered in (Self Assessment Filing Deadlines) and (Payment Dates, Interest and Penalties).
Worried your tax return might contain an error?
The earlier you act, the lower the potential penalty.
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