Nearly two million people face debt as soaring tax bills mean they are turning to overdrafts to meet HM Revenue and Customs’ (HMRC) demands as the 31 January deadline looms, Royal London has found.

Income tax receipts are expected to soar by around £35bn by 2028/29 as a result of fiscal drag, where rising incomes and frozen tax thresholds tip greater numbers of workers in into higher bands.

Around 12 million people are expected to fill in a self-assessment return for 2022/23. Those required to make a return under current rules include anyone with untaxed income covering those who are self-employed, those who own rental properties, anyone who earns more than £100,000, partners in business partnerships and anyone liable for the high-income child benefit charge.

As a result, research by Royal London found that many find themselves with tax bills they can’t afford or hadn’t budgeted for.

Research by the group, which surveyed 4,000 UK adults, revealed that more than a third (37%) of the 1.8 million people who will turn to overdrafts said they are shocked by the size of the bills they face with "payments on account" adding to the pain.

Of those surveyed, only half of those who are employed had set aside savings to pay their tax bill, compared to 69% of self-employed respondents.

Royal London also found that one in five (18%) of those who are employed said they expected to use overdrafts, while 9% of those who are self-employed said they would do so.

Consumer finance specialist at Royal London, Sarah Pennells, said: "It’s worrying that almost two million people are resorting to their overdraft to pay their tax bill this year, especially when overdrafts can be an expensive way of borrowing.

"People are also getting caught out by higher tax bills than they expect. If you’re going to struggle to pay this year’s tax, you may be able to set up a payment plan with HMRC, but one of the conditions is that you must be within 60 days of the payment deadline, so you must act quickly."

Research by Royal London also revealed a lack of understanding concerning taxpayers’ self-assessment obligations, with 27% of self-employed respondents saying they would not be filing a tax return.

HMRC imposes a penalty of 5% of the tax you owe if you’re more than 30 days late with your payment, with further penalties if you haven’t paid six months after the deadline. On top of that, you’ll be charged annual interest at 2.5 percentage points above the Bank of England base rate, meaning taxpayers could now face a 7.75% interest charge on any late payments.

Pennells added: "It’s equally concerning that there’s so much confusion about the self-assessment system almost 30 years after it was introduced, particularly about who needs to fill in a self-assessment tax return. If you’ve had income that you’ve not been taxed on, the chances are you’ll need to fill in a self-assessment tax return – unless it’s something like dividend income from investments held within an ISA – which is tax free.

"It’s a good idea to build some financial resilience by setting aside some money in a savings account. Look at the total tax you owed this year, from your July and January instalments, and put away a twelfth of that every month in a savings account to prepare for 2025. If you know you’re earning more this year, you may need to increase your monthly savings. Best buy easy access savings accounts are paying around 5% interest – so if you start saving now – you may even have a bit of extra interest this time next year."

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