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?

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 was closed. Now, filing a tax return late can be extremely expensive for you.

To start with, there will be a £100 penalty if the return is late, regardless of whether any tax due is paid on time.

Pro advice. The standard deadline for electronic returns is 31 January following the end of the tax year. However, if your client is new to self-assessment, the deadline could be later depending on when they receive a notification to file. You will always have at least three months from the date the return is issued.

Pro advice. Remember that if you prefer to pay any tax owed via your PAYE code in a later year, the return has to be filed on or before 30 December.

Daily penalties and beyond

If the return remains unsubmitted three months after the deadline, 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.

Pro advice. 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 for you to pay an estimate of what you owe if you know your return will be late.

For detailed commentary on penalties.

Interest

Most of you will be aware that 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%.

Pro advice. If you have both unpaid tax and accumulated penalties, this could mean the interest payable is considerably more than they think.

Example. Jed 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, but ensure you are aware that interest is also charged on outstanding penalties, as the rate hikes may mean a double hit.

This article has been reproduced by kind permission of Indicator – FL Memo Ltd. For details of their tax-saving products please visit www.indicator-flm.co.uk or call 01233 653500.