The penalty system for late tax returns and payments has been subject to a number of tweaks in recent years. What’s the position now, and how have rising interest rates affected matters? In this article, we will cover the key points that you need to know.
Self-assessment returns
It’s not all that long ago that filing a tax return late simply led to a £100 penalty – and only if there was any tax outstanding. However, this loophole has now been closed. Now, filing a tax return late can be extremely expensive.
To start with, there will be a £100 penalty if the return is late, regardless of whether any tax due is paid on time.
Daily penalties and beyond
If the return remains unsubmitted three months after the deadline, usually 31st January each year, HMRC starts to apply a penalty of £10 per day, up to a maximum of £900.
The next step up comes at six months and twelve months late, where on each occasion you will be charged the greater of:
- £300; or
- 5% of the tax owed.
So, a return filed just over one year late will attract penalties of at least £1,600.
Things are worse for partners in a partnership, as the penalties apply to the partnership return as well as the individual partners’ returns.
Late payment
If the tax is paid late, you will be charged:
- 5% of any tax unpaid after 30 days
- 5% of any tax unpaid after six months; and
- 5% of any tax unpaid after twelve months.
Note. There won’t be a penalty if there is no tax to pay, so it is always advisable to pay an estimate of what you owe if you know their return will be late.
Interest
HMRC charges interest on late payments, including on payments on account. However, what many may not appreciate is that interest is also charged on unpaid penalties. The penalty interest rate is the Bank of England base rate plus 2.5%. Recent hikes in the base rate mean that HMRC’s rate is currently 7.75%.
Example. Simon has unpaid tax of £10,000 and accumulated penalties for late filing and payment of £3,500 on 1 September 2023. He does nothing for twelve months. On top of any interest already charged, he will incur a further £775 (on the unpaid tax) and £271 (on the penalties) in the twelve-month period, assuming the current rate applies throughout.
It is no longer possible to escape a penalty for late filing by ensuring a tax payment is made on time. A tax return filed over a year late will attract penalties of at least £1,600. The recent hike in interest rates has also made late payments more expensive as interest is also charged on outstanding penalties.
