HMRC’s late payment fee highest in 15 years

Earlier in the year HM Revenue & Customs (HMRC) hiked the late tax return penalty to 7.5%, the highest seen in 15 years.*   

The increase was only one part of HMRC’s crackdown on late payers. In July HMRC also released updated guidance which warns taxpayers that it may adjust their tax codes to collect up to 50% of gross income in order to recoup outstanding debts.  

The move from HMRC was met with skepticism, with some accusing HMRC of profiteering amidst the cost-of-living crisis. This is mainly due to the disparity between late payment rates. However, HMRC has stressed that for those that can demonstrate a genuine reason why they cannot make the deadline, they will be ‘lenient’ in their penalty process. In theory, the penalties exist to punish deliberate tax evaders and those who persistently fail to complete their tax returns.

If a taxpayer is late then they must pay a rate of 7.5% as a penalty, but if HMRC is late on a payment then they only have to pay a 3.5% rate, less than half what the taxpayer needs to pay. A reported 600,000 self-employed taxpayers are set to miss the deadline this tax year. 

Why is HMRC cracking down on late repayments?

HMRC is currently under significant pressure to recover outstanding tax debt. The figures released in February this year revealed that the level of tax debt owed to HMRC rose by 22% year-on-year to reach more than £48bn as at 31 December 2022.

This total debt comprised £7.8bn of ‘managed debt’ and £40.3bn in debt available for pursuit.

While the numbers of taxpayers in Time to Pay arrangements fell by 14% over the previous year to 730,617 at the end of December 2022, the level of managed debt rose considerably by 88% to £7.8bn, up from 4.1bn in December 2021.*

The Tax Return Deadline 

Under normal circumstances, those who do not file their tax returns by the deadline receive penalties for late submission. This usually comes in the form of a 5% late payment charge on any unpaid tax that is still outstanding.  

Late payment interest is charged on overdue payments on account. For most tax payments, HMRC charges late payment interest at an annual rate equal to the Bank of England base rate plus 2.5%. Following successive hikes in base rate over the last 18 months, HMRC’s late payment interest rate now stands at 7.5%.

Many taxpayers may be significantly worse off than they were a couple of years ago due to the increased cost of living. Nevertheless, their average take-home income may well have increased, due to inflation-chasing pay rises and inflation-linked increases to pensions, as well as increased returns on savings income.

The Deadline Penalties

If you don’t file your tax return correctly by the deadline, you will be sanctioned with a penalty depending on how late you file your return. This penalty will begin at an initial £100 fixed fee and progress as follows: 

• After 3 months, you may have to pay a penalty of £10 a day, for a maximum of 90 days (£900)
• After 6 months, you may have to pay a further penalty of 5% of the tax you owe or £300, whichever is greater
• After 12 months, you may have to pay a further penalty of 5% of the tax you owe or £300, whichever is greater. HMRC have stated that in some cases at this stage, you may have to pay up to 100% of the tax you owe.

There are many reasons which mean we must pay tax, there are also products and means by which we can reduce the final amount of tax that you pay. 

Our tax planning services include certain products, allowances and guidelines to ensure your money is working its hardest and to ensure the tax you pay is ultimately a fair, yet minimal, amount.

For further information, check out our free guide on tax planning strategies for high earners. Alternatively, give us a call on 0333 323 9065 to book a free non-committal initial consultation with a member of our team. 

* Source: BDO

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This article is intended for general information only, it does not constitute individual advice and should not be used to inform financial decisions. 

This article is also based upon our understanding of current law, HM Revenue and Custom's practice, tax rates and exemptions which are subject to change.

The Financial Conduct Authority (FCA) does not regulate tax advice.