Changes to late payment penalties

The Chancellor of the Exchequer, the Rt Hon Rachel Reeves MP, delivered her Spring Statement to Parliament on Wednesday 26 March 2025.

One of the key changes introduced from 1 April 2025 is an amendment to late payment penalties. These changes will impact taxpayers registered for VAT and those under Income Tax Self-Assessment (ITSA) who are within the initial trial/voluntary cohort for Making Tax Digital for Income Tax (MTD ITSA). The measures are consistent with the government’s approach to tackling non-compliance over changes to tax rates or more widespread tax reforms.

The below illustrates the changes and references VAT by way of example.

From 1 April 2025, if a taxpayer pays a VAT liability late, the late payment penalties will be as follows:

• 3% of the outstanding tax if the liability remains unpaid for 15 days or more,
• An additional 3% if it remains overdue for 30 days or more, and
• 10% per annum if overdue beyond 31 days.

This represents an increase from the previous penalty process, which was:

• 2% at 15 days,
• 2% at 30 days, and
• 4% per annum from day 31.

To illustrate the impact of these changes, consider a business with an overdue VAT liability of £10,000:

• Tax overdue for 14 days or less – no penalty.
• Tax overdue between 15 to 29 days – £300 penalty.
• Tax overdue for 30 days – an additional £300 penalty.
• Tax overdue for 31+ days – daily charges of £2.74.

Therefore, a business with a tax liability overdue of 40 days will now pay £10,627 in total compared to the previous £10,410.

Late payment interest

In addition to these penalties, late payment interest will continue to accrue on any outstanding amounts. Interest is charged from the first day of overdue payment until full settlement.

From 6 April 2025, the interest rate will be calculated at the Bank of England (BoE) base rate plus 4% (previously, it was the base rate plus 2.5% on or before 5 April 2025). The BoE base rate is currently 4.5%, so interest applied by HMRC is 8.5%.

These changes align with the government’s initiative to encourage timely payments and reduce overdue tax liabilities. Furthermore, HMRC will recruit 500 additional compliance staff from April 2025 and another 600 debt management staff from April 2026 with the aim of enhancing tax collection and minimising the tax gap.

How to protect your business from such penalties

Schedule payment reminders

Set multiple reminders. Once the VAT return is submitted, make the payment immediately or schedule a payment with your bank for the due date to avoid oversight.

Utilise direct debit

Using Direct Debit ensures timely tax payments by automating the process, reducing the risk of missed deadlines due to human error. Additionally, businesses can benefit from extended payment terms, as the Direct Debit is collected on the 10th of the month or the next working day. This provides an extra three days of cash flow availability, which can be crucial for managing financial obligations.

Engage early with HMRC if settling the liability is going to be challenging

Businesses experiencing financial difficulties should contact HMRC before the payment deadline to arrange a Time to Pay (TTP) agreement. If a TTP arrangement is in place before a penalty is triggered, late payment penalties will not be applied, though late payment interest will still accrue. Despite the increased interest, this approach remains more cost-effective than incurring penalties.

By implementing these strategies, businesses can safeguard themselves from unnecessary financial burdens while ensuring compliance with tax obligations.

If you’d like to discuss these changes and how they may impact you, please get in touch.