Late payment tax penalties rise - how much more could you pay?

Disorganised landlords and the self-employed are set to receive higher fines if they file their self-assessment tax and VAT returns late.

Chancellor Rachel Reeves confirmed in her Spring Statement this week that penalty fees for businesses and landlords submitting a tax return late will rise from April 2025.

She hopes the hikes will bring in an extra £1 billion a year to the Treasury by the end of the decade in a bid to close the UK’s estimated £40 billion gap between tax paid and tax owed.

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The changes apply to landlords and the self-employed who report their earnings to HMRC through its Making Tax Digital (MTD) system.

Since April 2022, all VAT-registered businesses have been required to keep digital records and file returns through MTD-compatible software.

From 6 April 2026, those with annual gross income of more than £50,000 from self-employment and property lettings must use it.

Those with gross income above £30,000 from self-employment and property will need to join from April 2027 and the Treasury said the threshold will drop to £20,000 from April 2028.

Susannah Streeter, head of money and markets at Hargreaves Lansdown, said: ‘’Doing your tax return is never a favourite job but putting it off could be even more painful for your finances in the future. It will cost much more to be disorganised given that higher VAT and self-assessment fines are now looming. The UK government is scouting for easy wins to fill its coffers more effectively and has set its sights on the self-employed who use the platform Making Tax Digital to file their returns.”

How will tax return penalties change?

Currently, HMRC punishes Making Tax Digital platform users 2% of the outstanding tax if a VAT or self-assessment return is 15 days late, rising to 4% if more than 31 days behind.

From April 2025, this will jump to 3% of the tax outstanding where tax is overdue by 15 days; plus, 3% where tax is overdue by 30 days and 10% a year where tax is overdue by 31 days or more.

The changes will particularly impact small businesses, who do not have the same resources as larger corporations to quickly and accurately file their tax returns.

Streeter added “it’s an administrative burden which will really pay to be on top of. Starting early will mean there is less panic over paperwork. It’s always crucial to leave time to double check the returns, making sure you’ve completed every relevant section and inputted all the details.

“Set yourself plenty of reminders, and don’t forget to pay even once you’ve submitted all the data. May be able to arrange to pay in instalments – through a time-to-pay arrangement. There will be interest payments on top of the tax bill, but it’s going to be cheaper than the higher fines you can rack up for missing the deadline.’’

It comes as HMRC said 1.1 million people missed the self-assessment tax return deadline in 2024, but criticism has been levied at the body for their poor customer service. In January, the Public Accounts Committee found nearly 44,000 telephone customers were cut off without warning after being on hold with HMRC for more than an hour last year.

Reeves will also employ more private debt collectors and HMRC staff to help collect tax that has been withheld.

She will task the new private debt collectors to retrieve £1.3 billion in tax income over the next five years, at a cost of £80 million to the taxpayer.

At the same time, HMRC will employ an additional 600 staff in their debt management teams as the Treasury hopes to recover £13 of debt for each £1 spent on the new hires.

The chancellor also announced new funding for HMRC to recruit 500 more compliance officers.

Analysis by AJ Bell suggests a self-employed person owing £25,000 income tax will likely find themselves owing £26,913 after four months with tax or interest. Under the new rules this could be over £28,000, an increase in fines of around 6%.

Charlene Young, senior pensions and savings expert at AJ Bell, added: “Closing the tax gap should be a priority for HMRC, but the changes come against a backdrop of poor service levels and at a time when small business are gearing up for soaring tax and wage bills from April.

“There’s also the question about the four million taxpayers with income below the £20,000 threshold and how the fines will be enforced. Also included in yesterday’s announcements were plans to harness AI to aid with automated debt recovery.”