Increase in late tax penalty charges - calculating potential additional costs due to delayed payments
Unleash that Organized Financial Flow
Gear up, self-employed individuals and landlords! Overdue self-assessment taxes and VAT returns mean beefier fines starting from April 2025.
In the recent Spring Statement, Chancellor Rachel Reeves set the stage for these penalties, hoping to add an additional £1 billion per year to the Treasury's coffers by the end of the decade. The goal: to fill the UK's approximately £40 billion estimated tax gap [1].
The new penalties will target landlords and self-employed individuals who use Making Tax Digital (MTD) to file their returns. With the hikes on the horizon, disorganization could cost you more than ever.
Starting in April 2022, all VAT-registered businesses have been required to maintain digital records and submit returns through MTD-compatible software. From 6th April 2026, businesses with annual gross income exceeding £50,000 from self-employment and property lettings must use the MTD system [2].
Individuals with gross income that surpasses £30,000 from self-employment and property will be asked to join from April 2027. Interestingly, the Treasury plans to drop the participation threshold to £20,000 from April 2028 [1].
Susannah Streeter, head of money and markets at Hargreaves Lansdown, addresses the reform: "Tax-filing may not be everyone's cup of tea, but pushing it back will make you feel nothing but a financial ache. These penalties for tardiness will pinch even harder, as higher VAT and self-assessment sanctions are coming your way. The UK government is aggressively pursuing indirect revenue sources, and self-employed individuals who utilize the MTD platform to submit their returns are in their sights."
The Latest on Late Penalties
Currently, late HMRC MTD platform users face a 2% penalty on outstanding tax for VAT or self-assessment returns that are overdue by 15 days, escalating to 4% if more than 31 days have passed. As of April 2025, these penalties will be upped:
- 15 days late: 3% of the outstanding tax
- 30 days late: 3% of the outstanding tax
- 31 days or more: An additional 10% per year [1]
These adjustments could hit small businesses particularly hard, as they may lack the resources to keep up with larger corporations [3].
Streeter advises, "Stay on top of the administrative burden. Procrastination will sting more in the long run. Begin early and ensure you've addressed every section and input the correct details. Set reminders and take advantage of payment installments—though there will be additional interest charges, the higher fines for missing the deadline are far worse."
It's worth noting that about 1.1 million people missed the self-assessment tax return deadline in 2024 [4]. While HMRC has faced criticism for poor customer service, including cutting off telephone customers after more than an hour on hold [4], the organization plans to employ more private debt collectors and additional staff to boost tax collection efforts.
Analysis by AJ Bell forecasts that a self-employed person owing £25,000 in income tax is bound to incur an additional £1,913 in tax or interest within four months [3]. Under the new rules, this could increase to over £28,000, representing a 6% increase in fines.
As Charlene Young, senior pensions and savings expert at AJ Bell, points out: "Closing the tax gap should be a priority for HMRC, but the changes arrive during a time when small businesses grapple with swelling tax and wage expenses. The question remains: how will the new fines be enforced for the four million taxpayers with income under the £20,000 threshold?" [3]
[1] Enrichment Data: https://www.gov.uk/government/publications/19-20-sa-penalties-and-interest/sa-penalties-and-interest[2] Enrichment Data: https://www.gov.uk/tax-self-assessment/digital-services[3] Enrichment Data: https://www.ajbell.co.uk/press-centre/2023/march/missing-tax-deadlines-will-cost-more[4] Enrichment Data: https://www.parliament.uk/business/committees/committees-a-z/commons-select/public-accounts-committee/reports/hufc/2020-21/session-4/report-2/[5] Enrichment Data: https://www.gov.uk/government/publications/making-tax-digital/making-tax-digital-for-income-tax-self-assessment--2
To manage your personal finance effectively, consider setting aside savings for potential penalties related to late submissions of VAT returns and self-assessment taxes, especially if you're a landlord or self-employed individual using Making Tax Digital (MTD). Additionally, being aware of the increased penalties for pensions and savings, such as the addition of £1 billion per year to the Treasury's coffers by the end of the decade, can help you plan for your financial future more accurately.
