Late payment penalties rise to 10%

Late payment penalties rise to 10%

From this tax year, the slowest payers will face a ‘more than doubling’ in the penalty rate with no time to avoid this as the hike is already in place.

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

Penalties for late payments of income tax under self-assessment will also be increased, with those failing to pay within a month facing a 10% penalty, more than double the current rate from 1 April 2025. This regime will also be applied to VAT late payment penalties. These penalties are expected to raise £5m in the first year of operation, then 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, for this tax year.

These new penalties will apply 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.

There have been calls already regarding the growing disparity between the rates HMRC charges late payers, to the figure HMRC pays to taxpayers awaiting repayments, which is simply not comparable, with one person quoted as saying: ‘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.’