Late payments to HMRC – update

There is a first penalty and then an additional or second penalty with an annual penalty rate. 

 

First penalty up to day 30. As a taxpayer you’re responsible for making your payments on time. However, you won’t pay a penalty if you pay your outstanding tax within 15 days of the due date. The first penalty is applied at 2% of the outstanding amount on day 15 if you miss this deadline. If any tax is still due after day 30 you’ll pay 2% of the amount outstanding after day 15 plus 2% of the amount at day 30. 

 

Additional or second penalty from day 31. If tax is still unpaid on day 31 an additional penalty on the outstanding amount builds up at a rate of 4% per annum. The penalty only stops when you pay the full amount due. 

 

HMRC also automatically charges interest on late tax payments from the date the payment became due until you pay in full. 

 

HMRC links its interest rates to the Bank of England base rate. Late payment interest is set at base rate plus 2.5% to encourage people to pay on time. It’s similar to the payments you would make if you were late with your payments for a commercial loan or overdraft. 

 

For taxpayers who pay early or who pay too much there’s also a repayment interest rate. This is set at base rate minus 1% with the lowest limit set at 0.5%, known as the ‘minimum floor’. 

 

Following a cut in the base rate to 5.0% in August this year HMRC has reduced its late payment and repayment interest rates. From 20 August, the late payment interest rate went down to 7.5% from 7.75% and the repayment interest rate fell to 4.0% from 4.25%. 

 

VAT late submissions. If your accounting period started on or after 1st January 2023 each late VAT return now results in a penalty point. This even includes nil returns where you have nothing to declare. When you reach the penalty point threshold, which depends on your submission period, you’ll pay a £200 penalty. You’ll get a further £200 penalty any further late submissions while you’re at the points threshold. Your points will only disappear when you’ve established a good submission record. In the meantime, late payment penalties and interest will apply on overdue payments. 

 

ITSA late submissions. If you’ve signed up for MTD for ITSA new penalty rules came in to effect for you from April 2024. However, they will only apply on your annual obligations from January 2026. 

 

For late self-assessment tax returns outside MTD a £100 fine is applied immediately. If it’s more than three months late there’s a £10 daily penalty. At six months there’s a penalty of £300 or 5% of the tax owing if that’s greater. If your submission is 12 months late there’s another £300 or 5% of the tax owing. Sometimes 100% of the tax owed is charged. 

 

Under the new rules for MTD for ITSA you’ll receive a penalty point if you miss your annual submission deadline. You’ll pay a £200 penalty if you reach the points threshold for two late submissions and final declarations. Late payment charges and penalties will also apply to overdue payments. 

 

You can ask HMRC for a Time-to-Pay (TTP) arrangement if you know you can’t pay your tax bill on time. By agreeing a schedule for paying your outstanding tax you can stop the penalties building up from the day you approach HMRC. However, you must meet the terms of the agreement. 

 

The best way to avoid penalties and interest payments is to submit your tax returns in good time. Then you’ll know how much is due and you’ll have time to put money aside.