Self-employed given harsher penalties for late tax funds in Spring Statement

More taxpayers will face harsher late payment charges under new rules announced alongside Chancellor Rachel Reeves’ Spring Statement. 

The Treasury published plans to increase late payment penalties for VAT and income tax self-assessment (Itsa) taxpayers as they join the ‘Making Tax Digital’ scheme from April 2025.

The digital scheme requires individuals and businesses to keep digital records and submit updates every quarter.

VAT and Itsa taxpayers face charges from His Majesty’s Revenue and Customs if they file late, which includes a first penalty then an additional penalty, with an annualised penalty rate.

Currently, a taxpayer will not incur a penalty if the outstanding tax is paid within the first 15 days after the due date. 

After day 15 they are charged a fine of 2 per cent of the tax due.

Late payment: VAT and self-assessment taxpayers face higher late payment charges 

If the tax is still unpaid after 30 days, taxpayers will face another 2 per cent, meaning a total 4 per cent charge by day 30.

From April 2025, taxpayers that are part of the MTD scheme will be charged 3 per cent of the outstanding tax where their tax is overdue by 15 days, plus another 3 per cent if it is still unpaid at 30 days.

They will also face a doubling of the annualised rate, from 4 per cent currently to 10 per cent.

The government said it was increasing the charges ‘to encourage taxpayers to pay on time’.

These penalties are separate to the late charges applied to self-assessment tax returns that are due before 31 January. 

For those who fail to file on time, they face an initial £100 penalty, and if it is still not paid after three months they will face additional charges of £10 per day, up to a maximum of £900.

After six months, a further 5 per cent will be added to the amount due or £300, whichever is greater. And after 12 months, another 5 per cent or £300.

HMRC calculates late payment interest by adding 2.5 per cent to the base rate but its repayment interest is set at the base rate minus 1 per cent. 

It means that if you are late to file you will pay nearly double in interest compared to any amount that HMRC owes you.

The Treasury also announced that HMRC would restart ‘direct recovery’ of tax debts owed by individuals and businesses that have the ability to pay but choose not to. 

It said it would also explore options to automate the process to collect lower value tax debts.