Late payment penalties rise to 10%

Sara White, Editor, Business & Accountancy Daily

Late payment penalties for taxpayers are set to increase from the new tax year, the chancellor announced in her first Spring Statement

The slowest payers will face a more than doubling in the penalty rate with no time to avoid this as the hike comes into effect from the beginning of April.

As part of the general push to close the tax gap, late payers will face a much more punitive penalty regime from the 2025-26 tax year next week.

Penalties for late payments of income tax under self assessment will be increased, with those failing to pay within a month facing a 10% penalty, more than double the current rate from 1 April. This regime will also be applied to VAT late payment penalties. This will raise only £5m in the first year of operation, then shooting up to £50m in additional penalties in 2026-27, with Treasury estimates showing this could rise to as high as £125m in extra revenue by the end of the parliamentary term.

The penalties will rise from 2% to 3% of unpaid tax at 15 days, 2% to 3% at 30 days, and 4% to 10% from day 31. This will take effect from April 2025.

The rise in penalties comes on the back of upcoming 1.5% increase to the HMRC interest rate for late payments, which is being hiked from next month and is expected to raise an additional £1.2bn over the course of the parliament.

Jon Claypole, head of tax dispute resolution at BDO, said: ‘At the Autumn Budget last October, HMRC announced that late payment interest would increase by a further 1.5% from 6 April this year.

‘Today, the Chancellor went one step further by increasing late payment penalties by 50% or more.

‘These new penalties will apply from next month to businesses that fail to pay their VAT liabilities on time. These will then be extended to those who will start to pay income tax through the new Making Tax Digital regime for Income Tax starting in April 2026.

‘With businesses under increasing cost pressures this year, it’s like to get harder for HMRC to collect tax arrears. There is already an eye-wateringly high level of tax that’s owed to the Exchequer but remains unpaid.’ 

But there are concerns that raising the penalties could be counterproductive.

Ellen Milner, director of public policy at the Chartered Institute of Taxation (CIOT), warned: ‘In cases where taxpayers pay late, HMRC must have robust processes in place to understand the reasons why and provide support where necessary. For those struggling to pay, simply increasing the amount owed may do nothing but increase the barrier to settling their debt, leaving everyone worse off.’

There is also a growing disparity between the rates HMRC charges late payers, to the figure HMRC pays to taxpayers awaiting repayments, which is simply not comparable.

Milner added: ‘When the total cost is considered, HMRC could be charging taxpayers who owe them money nearly twelve times the amount that HMRC pay to taxpayers on monies which have been overpaid.  

‘It is important that HMRC recognise the impact on cashflow where repayments are not paid out quickly. And in cases where taxpayers pay late, HMRC must have robust processes in place to understand the reasons why and provide support where necessary.’

The increase in the interest rate will raise an additional £255m this tax year, going up to £260m in 2026-27. 

HMRC late payment interest is charged to taxpayers as follows:

• late paid tax at Bank of England rate (BR) + 2.5%, increasing to BR + 4%

• late paid quarterly instalments of corporation tax at BR + 1%, increasing to BR + 2.5%

• late paid customs duty at BR + 2%, increasing to BR + 3.5%.