Policy paper

Increase to VAT and other taxes late payment penalties percentage rate relating to penalty reform

Published 1 April 2025

Who is likely to be affected

Taxpayers who do not pay their VAT and Making Tax Digital for Income Tax Self Assessment at the required time will incur higher penalty charges.

General description of the measure

The government will increase late payment penalties imposed by schedule 26 to the Finance Act 2021 on unpaid tax liabilities for VAT and Making Tax Digital for Income Tax Self Assessment taxpayers. It includes increases in penalties from:

• 2 percentage points to 3 percentage points at 15 days
• 2 percentage points to 3 percentage points at 30 days
• 4 percentage points to 10 percentage points per annum from day 31

These changes will take effect from 1 April 2025 for taxpayers who the new penalty regime in schedule 26 already applies to. This includes VAT taxpayers and volunteers testing the Making Tax Digital system. The changes will also apply in the future to any tax regime that enters schedule 26.

Policy objective

Increasing late payment penalties that are already in place increases the differential between those that pay on time and those that do not. This will encourage those that do not pay on time and maintains fairness for those that do pay on time.

This measure will encourage taxpayers in genuine difficulty to contact HMRC to make time to pay payment plans. Those in an agreed plan will not be charged late payment penalties.

This forms part of a wider package of measures to close the gap between tax owed and tax paid.

Background to the measure

Penalty reform introduces a common approach to modernise the tax system in relation to late filing and late payment penalties set out in schedule 26 Finance Act 2021. It is designed to make the sanctions for failing to file or pay on time fair and effective. They incentivise compliance, building confidence in the tax system, which will protect public finances. Currently penalty reform applies to VAT taxpayers and those who volunteered for the Income Tax Self Assessment Making Tax Digital pilot.

Detailed proposal

Operative date

This change will have effect from 1 April 2025.

Current law and proposed revisions

Late payment penalties are set out in schedule 26 to Finance Act 2021. This measure will amend the figures currently set out in paragraphs 5 and 8 of schedule 26.

Summary of impacts

Exchequer impact (£ million)

2024 to 2025	2025 to 2026	2026 to 2027	2027 to 2028	2028 to 2029	2029 to 2030
0	+5	+50	+85	+105	+125

These figures are set out in Table 3.1 of Spring Statement 2025 and have been certified by the Office for Budget Responsibility. More details can be found in the policy costings document published alongside Spring Statement 2025.

Economic impact

This measure is not expected to have any significant macroeconomic impacts.

Impact on individuals, households and families

This measure will have no impact on those who pay their liabilities on time. Only those who fail to pay their liabilities by the required date will be liable to penalties.

Equalities impacts

It is not anticipated that there will be disproportionate impacts for those in groups sharing protected characteristics.

Impact on business including civil society organisations

This measure is expected to have no impact on compliant businesses and civil society organisations.

Operational impact (£ million) (HMRC or other)

The operational impacts of implementing this change are expected to be negligible and would be picked up as part of business as usual.

Guidance will be updated to reflect the new penalty rates.

Other impacts

Other impacts have been considered and none have been identified.

Monitoring and evaluation

The measure will be monitored and assessed alongside other measures in the government’s package for closing the tax gap.

Further advice

If you have any questions about this change, please contact Katherine Smith on 03000 540 166 or email katherine.smith@hmrc.gov.uk.