Late payment penalties for UK taxpayers will soon rise to 10%, as announced by the Chancellor in her first Spring Statement. Effective from the start of April 2025, this change marks a significant shift in HMRC’s approach to late income tax and VAT payments. The new penalty regime is designed to encourage timelier settlement, but there are concerns that the increases may disproportionately affect smaller businesses and individuals who are already experiencing financial pressure.
Penalty increases for late taxpayers
Starting in the 2025/26 tax year, taxpayers who fail to pay their income tax or VAT on time will be subject to increased penalties. The new model imposes penalties sooner and at higher rates, with non-payers facing 3% after just 15 days of late payment, increasing to 10% by day 31. These penalty rates are more than double their current levels and come alongside an impending 1.5% rise in the HMRC late payment interest rate, which is projected to generate an additional £1.2 billion for the Treasury over this parliamentary term.
Government estimates show that the revised penalties will raise approximately £5m in the first year of operation, escalating to £50m by 2026/27. By the end of the parliamentary term, this sum could reach as high as £125m, underscoring the potential significance of these changes for the Exchequer.
In parallel, HMRC has been tasked with strengthening its enforcement capabilities. Recruiting additional staff and upgrading technological resources are central to the Government’s plan to reduce the tax gap. The new penalty model reflects a broader emphasis on compliance, with authorities taking a less tolerant approach to those who miss deadlines.
Ellen Milner, director of public policy at the Chartered Institute of Taxation (CIOT), said:
“In cases where taxpayers pay late, HMRC must have robust processes in place to understand the reasons why and provide support where necessary. For those struggling to pay, simply increasing the amount owed may do nothing but increase the barrier to settling their debt, leaving everyone worse off.
“When the total cost is considered, HMRC could be charging taxpayers who owe them money nearly twelve times the amount that HMRC pay to taxpayers on monies which have been overpaid. It is important that HMRC recognise the impact on cashflow where repayments are not paid out quickly. And in cases where taxpayers pay late, HMRC must have robust processes in place to understand the reasons why and provide support where necessary.”
Other highlights from the Spring Statement
While the Spring Statement did not introduce sweeping changes to personal or business taxation, the Office for Budget Responsibility’s (OBR) latest Economic and Fiscal Outlook revealed updated forecasts for growth, inflation, borrowing and debt. Against a backdrop of geopolitical uncertainties, fluctuating global energy prices and continued inflationary pressures, the Chancellor reiterated her focus on public finances.
Key spending areas include defence and infrastructure, with an additional £2.2bn designated for the Ministry of Defence in 2025/26 and a further £13bn earmarked for capital investment in major projects. The Government hopes these initiatives will spur economic growth, secure essential public services and strengthen national resilience.
Housebuilding also features prominently. The Chancellor emphasised planning reforms intended to boost construction rates, which could bolster growth by supporting the trades and property sectors. Although the immediate impact remains to be seen, future opportunities may arise for developers, suppliers and professional advisers who can help navigate the evolving tax and compliance landscape.
Finally, the Government confirmed it would be extending the Making Tax Digital (MTD) requirements in phases from 2026 onwards for self-employed individuals and landlords above certain income thresholds. This move aims to modernise tax administration, although it may also add extra compliance steps for those unfamiliar with digital record-keeping.
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