The recent Spring Statement delivered by the Chancellor has brought some unwelcome news for taxpayers: late payment penalties are set to increase significantly. This change, aimed at reducing the tax gap, will hit the slowest payers hardest, with the most severe increases coming into effect from the beginning of April. It’s crucial for individuals and businesses to understand the implications of these changes and take steps to ensure timely tax payments.
A More Punitive Penalty Regime
From the 2025-26 tax year, the government is introducing a much stricter penalty system for late payments, particularly affecting income tax under self-assessment and VAT. Currently, those failing to pay within a month face a 5% penalty, but this is set to more than double. While the initial impact is estimated to raise £5m in the first year, Treasury projections indicate a substantial increase in additional penalties collected in subsequent years, potentially reaching £125m by the end of this parliamentary term.
Here’s a breakdown of how the penalties will change from April 2025:
Penalties will rise from 2% to 3% of unpaid tax at 15 days.
Penalties will rise from 2% to 3% at 30 days.
Penalties will rise from 4% to 10% from day 31.
Increased Interest Rates Compound the Problem
Adding to the financial strain, these penalty increases come on the heels of a 1.5% hike to the HMRC interest rate for late payments, which is scheduled to take effect from next month. This increase is expected to generate an additional £1.2bn over the course of the parliament.
We think these changes, combined with increasing cost pressures on businesses, are likely to make it even more challenging for HMRC to collect outstanding tax. The amount of tax owed to the Exchequer is already alarmingly high, and these measures could exacerbate the issue.
Concerns About Counterproductivity
There are growing concerns that these harsher penalties could be counterproductive. It is highly likely that by simply increasing the amount owed may not encourage payment from those already struggling. In fact, it could create a bigger obstacle to settling their debt, leaving both taxpayers and HMRC in a worse position.
Disparity in HMRC Rates
Another point of contention is the significant difference between the rates HMRC charges late payers and the rates it pays to taxpayers awaiting repayments. HMRC could be charging taxpayers who owe money nearly twelve times the amount that HMRC pays to taxpayers on overpaid monies. This disparity raises questions about fairness and the impact on taxpayer cash flow when repayments are delayed.
What You Need to Know…..
Here’s a summary of the HMRC late payment interest charges:
Late paid tax: Bank of England rate (BR) + 2.5%, increasing to BR + 4%.
Late paid quarterly instalments of corporation tax: BR + 1%, increasing to BR + 2.5%.
Late paid customs duty: BR + 2%, increasing to BR + 3.5%.
Act Now to Avoid Penalties
With these changes on the horizon, it’s more important than ever to ensure your tax affairs are in order and that payments are made on time. Understanding the new penalty regime and taking proactive steps can help you avoid unnecessary financial burdens.
Need Help? Contact Max Pro Accountants and Tax Advisers
Navigating the complexities of tax law can be daunting, and these new penalties add another layer of challenge. If you have any questions about these changes, or if you need assistance with any aspect of your accountancy or tax affairs, don’t hesitate to reach out to us and contact us HERE. Our team of experts is here to provide guidance and support to help you stay compliant and avoid costly penalties. Contact us today for professional advice and assistance.