Tax Debt and Mental Health​

Debts can mount up and can become a source of stress, depression or anxiety. If you find yourself in this situation, there are resources available to help you. In this guide we focus on tax debt, how to deal with it, and where you can get help if you need it.

What is tax debt?

Tax debt is a situation that many people find themselves in from time to time. It can happen if you’re on the wrong tax code, for example, or if you’ve made a tax refund claim for more than you’re owed. However it happens, it’s important to solve the problem as quickly as possible. The longer you leave your debt unpaid, the worse the situation gets.

One of the easiest ways to end up dealing with a tax debt is when you file Self Assessment tax returns – or when you’re supposed to and don’t. Even if you don’t actually end up owing any tax, if HMRC’s expecting a return from you and don’t receive one, there can be problems.

This affects more than just the self-employed, too. There are several reasons why the taxman might be waiting for a Self Assessment return from you. Maybe you’re the Director of a company, or just making a little extra by renting out a room or selling regularly on eBay. Whatever the reason, if you don’t hit the Self Assessment filing deadlines, you’re probably going to get a penalty.

If paying up straight away is a problem, you’ve got a range of options for settling up -and HMRC is usually more than willing to help you find a solution that works for both you and them. Ignoring the problem won’t resolve it, though, and can lead to automatic fines and penalties.

Penalties for not paying

Tax debts have a nasty habit of creeping up on you, mainly because people don’t understand the rules. The first many people even hear about a tax debt is when HMRC gets in touch about it. Pretty soon they find themselves fines and stacking penalties. Not long after that comes the phone call from HMRC Debt Management and Banking (DM).

You can’t afford to ignore a warning from HMRC that you owe a tax debt, even if you’re sure it’s a mistake. HMRC has a whole range of options it can pursue to reclaim the money they’re owed, including:

• Direct Recovery of Debt, where they can access your bank account directly.
• Selling your personal goods at auction.
• Bankruptcy proceedings.

Here are some common penalties HMRC can apply:

• Missing the Self Assessment deadline (31st of October for paper returns, 31st of January for online filing: £100.
• Up to 3 months late: daily £10 fines up to a maximum of £900.
• 6 months late: £300 or 5% of what you owe if that’s higher.
• 12 months late: £300 or 5% of what you owe if that’s higher.

Keep in mind that HMRC automatically charges interest on late tax payments as well. If you’ve got a really good reason for missing the deadlines, you might be able to argue your penalties down or appeal against them. Don’t count on that, though. The list of valid excuses is pretty short.

When to talk to HMRC and what to say

The basic rule of thumb about contacting HMRC is to do it sooner rather than later. For starters, you’re going to want to ring them immediately if you’ve got a payment or filing deadline looming and you already know you’re not going to hit it. If the deadline’s already flown by, of course, the longer you wait the worse things will get. Sending up a distress flare early is the best way to limit the damage – or even avoid it altogether.

Another time to jump on the phone to HMRC is if you spot anything wrong with your tax statement. Mistakes on your Self Assessment can usually be sorted out easily before the deadline by just amending your tax return online. If it’s too late for that, you need to reach out to the taxman as soon as possible. You’ll probably have to sit on an automated queue for a while, particularly at busy times of year. It’s still a lot better than waiting for the mistake to catch up with you further down the line, though. If HMRC has to come looking for you, the ride tends to be a little bumpier.

As for how HMRC can actually help when you’ve got a tax debt you can’t pay, there’s actually quite a lot they can do. If you know you’re going to have problems paying up, you might be able to sort out a “time to pay agreement” with them. You’ll have to cough up a little interest on top of what you owe, obviously, but it’s better than choking on a debt you can’t pay off at all.

You’ll be expected to explain why you can’t pay in order to arrange a ''time to pay agreement''. That’ll mean forking over some information about what you’re routinely earning and spending. There might also be some questions about other family members’ earnings. Again, don’t resort to guesswork when you’re answering these types of questions. Arrange to call them back when you’ve got what they need.

If you’ve got any particular circumstances limiting your ability to pay, HMRC will want to know about these too. Any illnesses or business crises you’ve been weathering can be useful information, for example. Your agreement might involve paying off a chunk of your debt now, then the rest by instalments later. That’s a good option if you can afford the initial lump, as it’ll make the debt cheaper in the long run.

Once you’ve got your agreement in writing, you should also let HMRC know if your circumstances change. Don’t wait until you miss an instalment to get in touch. When it comes to paying off a debt like this, planning ahead is everything.

Dealing with debt

As for what to do when you’re already stuck with serious debt problems, you’ve got a variety of options. Again, the right approach will depend on the situation.

Debt Management Plan

One example is the debt management plan. This is basically just an agreement to pay off your debts in an affordable way. They’re often arranged through specialist companies, who charge a fee to share out your repayments among the people you owe. You’ll need to provide some information about yourself and your circumstances, and the plan can be cancelled if you don’t keep to the agreement.

Administration Order

For debts up to £5,000 when you’ve got a County Court or High Court judgement against you, you might end up with an administration order. In this case, it’s the local court that divides up your monthly repayments among your creditors. While it’s not ideal, it does mean that the people you owe can’t take any more action against you without a court’s approval. There’s a court fee to pay for this, but it can’t be higher than 10% of your total debt.

Individual Voluntary Arrangement

Another option is an Individual Voluntary Arrangement (IVA). You make regular payments to an insolvency practitioner, who splits them between the people you owe. IVAs give you more freedom than declaring bankruptcy. However, you can still end up facing bankruptcy proceedings if you break their terms. Your creditors get a say in this as well, of course. Unless the people you owe at least 75% of the money to agree, you can't take out an IVA at all.

Debt Relief Order

For debts up to £20,000, you can sometimes get a Debt Relief Order to help soften the blow. If you qualify for one, your creditors will need a court’s permission to pursue you. Also, you’re generally considered clear of debt after 12 months. DROs are designed for people with very little spare cash, and who don’t own their own home. You’ll need to apply through an authorised debt adviser. If you meet the criteria (if you’ve got less than £1,000 of assets, for example), you pay a £90 fee to an “official receiver” and accept a few restrictions. You can’t be a company Director, for instance. You also can’t borrow over £500, open a bank account or manage a business without telling people about your DRO.

Bankruptcy

With bankruptcy, your situation is considered by the Insolvency Service. If they agree, and your debts are all unsecured, you'll again be given some rules to follow about handling your money and assets. Some of your property might be sold to pay your debts, and you might have to turn over things like bank cards. Even your home can sometimes be sold, depending on your circumstances. Despite this, bankruptcy really does protect you much as your creditors. Your pension savings, for example, are usually kept safe - along with your household essentials and anything you need for your job.

Support available

Remember we mentioned that the important thing is to understand you’re not alone? It’s so easy to get caught up in your own head when you’ve got debts that feel out of control. This goes for all kinds of debt, not just taxes. When there’s interest stacking up and legal threats looming, it can feel like a lonely and dangerous world. However, there’s a whole range of support for people with debt problems. The right help for you is going to depend on your circumstances – but in a lot of cases it might be as simple as claiming a tax rebate.

Every year, HMRC ends up sitting on many millions in unclaimed tax refunds – simply because people don’t realise what they’re owed. When you’re paid via PAYE, many of the essential expenses of doing your job can earn you tax back from HMRC each year. For most refund claims, this means getting tax relief for travel to temporary workplaces, but there are lots of other expenses you can claim for.

For the self-employed, the system’s a little different, since you’re actually being taxed on your profits. When you file your Self Assessment return, all the necessary costs of doing business count against the income you’re paying tax on.

In either case, the rules on expenses can be tricky to get your head around, so lot of people choose to get professional help. Getting your taxes sorted properly, whether on your own or with expert help, can be a big step toward ending debt problems before they start.

Bringing the costs of your debts down

There’s a general rule that a lot of people cling to about managing money troubles – you can’t borrow your way out of debt. It’s broadly true, as far as it goes, but it really doesn’t paint the whole picture. For instance, while borrowing to pay off debts isn’t always a great idea, it is possible to trade an expensive debt for a cheaper one. Not all debts are equally expensive – just ask anyone who ever switched a credit card balance to another provider for a 0% interest rate. You’ve got to get a bit hands-on to make the most of things like this. Even so, you could lighten your load a lot with just a few careful moves.

We really do mean careful moves here. Don’t leap at the first quick loan option you find. Payday loans, for instance, are sold to you on the idea that they're easy to get and a fast way to nab yourself some short-term cash. That's all true, but you're really only squinting at the big picture here. If you don't keep your wits about you, you might just be digging a much deeper hole than the one you’re already in. For instance, let's say you get a payday loan of £600 for 6 months, at 0.75% interest a day. You get your £600 now, but at the end of the loan you'll be paying back a whopping £1138.29 – almost double what you borrowed. That's a “representative APR” (the interest rate plus all the associated charges) of 1,086%!

With any kind of debt, the first thing you need to do is get control of your spending. Once you’ve got a handle on that, it’s time to look at things like:

• Checking what benefits, grants or other support you might be entitled to.
• Finding out if you can claim a tax refund.
• Making sure you’re in the correct Council Tax band – a surprising number of people aren’t.
• Move credit card and other debts to cheaper providers where possible.
• Considering whether it’d work out cheaper to remortgage your home to pay off high-interest debts. Be careful, though, switching an unsecured debt to a secured one like this can be risky.

A key thing to remember is that debt interest basically always stacks up higher and faster than savings interest. It’s painful to dig into your savings to pay off a debt, but it still means paying less over time.

What to do if your debt is affecting your mental health

If there’s one thing we still don’t talk about enough in the UK, it’s mental health. There’s still so much stigma attached to issues like stress, anxiety and depression – particularly in industries like construction. UK construction workers commit suicide at over 3 times the national average – and still so few people who are suffering feel like they can get the help they need. When you’re dealing with the toughest aspects of HMRC and debt, it can take a serious toll on your mental health.

Thankfully, HMRC does have a few policies in place to help people through difficult times. In fact, it’s their legal responsibility to make what they call “reasonable adjustments” to assist people with certain mental health conditions in using their services. Depression, for example, can count as a “disability” and be covered under the reasonable adjustments system.

Basically, if you qualify, HMRC can do a few things to make life a little easier when dealing with them. It may be as simple as contacting you in writing rather than over the phone, for instance, or taking extra care to make sure you’ve understood everything. You may be able to arrange for a relative or friend to speak to HMRC on your behalf, if you can’t handle it yourself. Even if your condition doesn’t fully count as a disability, you can still ask for HMRC to take it into account in their dealings with you. They’ve started taking mental health very seriously, working hard on improving their training to better accommodate sufferers’ needs. There’s even a “Needs Extra Support” (NES) system, where they tend to throw out their standard scripts and procedures in favour of offering more personalised, one-to-one help.

The thing is, they won’t know to offer you all this extra support unless you explain that you need it. You have to ask them to put a note in your file describing your condition or problem. That way, you won’t end up going round in circles every time you speak to a new person. As always, the sooner you ask for help the better things will work out.

Signs of stress, depression and anxiety

When it comes to mental health problems, the first and most important step is recognising the signs. Crucially, it’s just as essential to learn to spot them in your colleagues, friends and family as in yourself. Here are a few early warning signs that you or someone else may be struggling with mental health.

• Difficulty sleeping, concentrating or remembering things.
• Feeling nervous, irritable or overwhelmed.
• Feeling burned out or hopeless.
• Lacking energy or motivation.
• Increased heart rate, sweating, trembling or rapid breathing.
• Feeling weak, restless or tense.
• Gastrointestinal trouble or changes in your eating patterns.
• Difficulty making decisions or engaging with other people.
• Uncontrollable worry, panic or anxiety.
• Suicidal thoughts.

That's a long list - and almost everyone can check off a few of those symptoms from time to time. The trick is recognising when you're getting swamped by things, and reaching out before it goes too far.

Taking manageable, practical steps

With debt problems, it’s tempting to look for “quick fix” solutions – but that’s usually a mistake. A lot of people simply end up swapping one set of debts for another, potentially much larger, one. The same goes for looking after your mental health. Any looming problem become a lot more manageable when you break it down into smaller steps. With debt, that can mean spotting the signs of trouble early, understanding the causes and making a plan to tackle them.

The exact same process applies to mental health. It can be tough to break the cycle of mounting money problems causing stress or anxiety – which then only worsen the money trouble. The best place to start is often with the practical side – cutting out problem spending and bringing down the cost of your debts. However, that won’t always be possible when your mental health is tripping up your efforts. Again, though, taking small positive steps is the surest way to get things moving in the right direction. That can mean coming to terms with the relationship between your mood and your spending habits, for example. Once you start spotting the patterns, it can get a lot easier to attack the problem at its roots.

If you’re worried about getting professional mental health help, don’t be. There’s a lot more to it than the old stereotypes of medication and side-effects suggest. In fact, a lot of mental health issues can be handled without ever getting a prescription, through things like Cognitive Behavioural Therapy. For many people, improving mental health is all about changing the way they think. It takes a little practice, but can be very effective if you stick with it.

The main point is to give yourself permission to take back control. Once you’ve seized the reins of your own mental health, you’ll be in a much better position to be proactive about your debts. While you’re at it, give yourself permission to get qualified help as well. There’s no shame in suffering from poor mental health, just as there’s no shame in struggling with debt. Don’t be fooled into thinking you have to tough out either alone. No debt crisis is impossible to fix, and there’s a whole range of organisations out there offering real, practical and judgement-free solutions. You can get free of your debts with the right guidance, and no one needs to suffer alone through a mental health crisis.

Where to get additional help

When debt issues lead to, or worsen existing, mental health problems, knowing where to look for help is critical. In terms of basic, practical guidance, you could do a lot worse than the Citizens Advice Bureau. They have a comprehensive service for debt issues, even if they’ve reached the point where people are repossessing your belongings. National Debtline is also a great option for free and confidential advice.

Stepchange is a charity dedicated to helping people conquer their debt problems, helping 650,000 people a year. They’ve got specialised services for people with mental health issues with a free advocacy system. While we’re on the subject, there’s a fantastic list of helplines and support groups for mental health issues on the NHS website, covering everything from stress and depression through to panic attacks and bipolar disorder. There’s even a specialist charity called The Lighthouse Club for the construction industry, where mental health is a serious issue. They have a dedicated helpline and even a construction worker mental health app.

Good planning, expert guidance and practical help will go a long way toward getting your fears and finances under control, and there are so many resources out there to get you back on track. Debt and depression both grow fastest in the dark. Don’t suffer in silence, particularly at the cost of your mental health.

Other useful debt contacts, charities and organisations include:

• The Money Advice Service (0800 138 77 77)
  • Provides guidance on a range of money and debt problems, from moving home to starting a family.
• Mental Health and Money Advice
  • An online advice service focused on helping people to understand, manage and improve their financial and metal heath.
• Money Saving Expert
  • The largest UK consumer advice website, helping to bring down bills, tackle debt and save cash.
• Debt Advice Foundation (0800 043 40 50)
  • A charity offering free, confidential debt advice.  Aims to give you back control of you finances
• Mental Health Foundation
  • Organisation helping people to understand, protect and sustain good mental health.
• Mind
  • The mental health charity, determined to help people understand the relationship between money worries and mental health, and to show them how to improve both.
• NHS Moodzone
  • A no-nonsense survival guide for people suffering from financial stress.