The reformed penalty system for late payment of tax began from 1 January 2023 for VAT, and from April 2024 for taxpayers who volunteer to test the Making Tax Digital (MTD) for income tax self assessment (ITSA) service.  

It will start from 6 April 2026 onwards for all other MTD ITSA taxpayers as MTD is rolled out. This means that it will apply to: 

• ITSA taxpayers with business or property income over £50,000 per year from the 2026/27 tax year onwards; and
• ITSA taxpayers with business or property income over £30,000 per year from the 2027/28 tax year onwards. 

How penalties are charged 

An initial late payment penalty is charged if the related tax is not paid within 15 days of the due date. The penalty is equal to 2% of the amount outstanding at day 15, plus 2% of the amount outstanding at day 30. A second late payment penalty is charged at the rate of 4% per annum, calculated on a daily basis on the total unpaid tax incurred from day 31. 

The reformed penalty system is set out in Sch26, Finance Act 2021.  

The proposed changes 

HMRC is consulting on draft regulations that amend the rules relating to the second penalty. Currently, HMRC can assess the second penalty at the point at which the tax is paid in full, within two years of the due date of the relevant payment of tax. The purpose of the two-year time limit is to give taxpayers certainty about when penalties are charged.  

The draft regulations allow HMRC to assess the second penalty even where the outstanding tax has not been paid in full, before the end of the two-year time limit. HMRC believes that this will prevent taxpayers intentionally avoiding a second penalty by not paying the tax before the end of the two-year time limit.  

The deadline for responding to the consultation is 10 June 2024. If you have comments on the proposals that could contribute to a response from ICAEW, please contact Richard Jones.