Compliance
Avoiding Late Payment Penalties: Strategic Compliance Tips Under the New UK Penalty Regime
HMRC has significantly increased late payment penalties for VAT and MTD eligible ITSA; if you miss deadlines, penalties have risen steeply. Here's what you need to know to stay compliant and avoid surprise charges.
By NomadicTax Research Team • 6 min read • November 22, 2025
## The New Penalty Landscape (Effective 1 April 2025)
The UK’s Schedule 26 of the Finance Act 2021 has been amended via **The Finance Act 2021 (Increase in Schedule 26 Penalty Percentages) Regulations 2025**. These changes took effect from **31 May 2025** for failures to pay tax liabilities where the due date falls on or after that date. ([legislation.gov.uk](https://www.legislation.gov.uk/uksi/2025/589/made?utm_source=openai))
Key changes include:
- Penalty rate for unpaid tax at **15 days** beyond due date: from **2%** to **3%**. ([gov.uk](https://www.gov.uk/government/publications/increasing-vat-and-other-taxes-late-payment-penalties-percentage-rate-relating-to-penalty-reform/increase-to-vat-and-other-taxes-late-payment-penalties-percentage-rate-relating-to-penalty-reform?utm_source=openai))
- Penalty rate at **30 days** also raised from 2% to 3%. ([gov.uk](https://www.gov.uk/government/publications/increasing-vat-and-other-taxes-late-payment-penalties-percentage-rate-relating-to-penalty-reform/increase-to-vat-and-other-taxes-late-payment-penalties-percentage-rate-relating-to-penalty-reform?utm_source=openai))
- For amounts unpaid after 30 days, the **annual rate** (from day 31 onwards) increased from **4%** per annum to **10%**. ([gov.uk](https://www.gov.uk/government/publications/increasing-vat-and-other-taxes-late-payment-penalties-percentage-rate-relating-to-penalty-reform/increase-to-vat-and-other-taxes-late-payment-penalties-percentage-rate-relating-to-penalty-reform?utm_source=openai))
## Who Is Affected
- VAT taxpayers already under Schedule 26—including those enrolled in Making Tax Digital (MTD). ([gov.uk](https://www.gov.uk/government/publications/increasing-vat-and-other-taxes-late-payment-penalties-percentage-rate-relating-to-penalty-reform?utm_source=openai))
- ITSA-taxpayers who will be brought into MTD. Once you’re mandated, these penalties apply. ([gov.uk](https://www.gov.uk/government/publications/penalties-for-late-submission/penalties-for-late-submission?utm_source=openai))
- Taxpayers with any unpaid liabilities due **from 31 May 2025** onwards. If the due date is before that, the previous regime may apply. ([legislation.gov.uk](https://www.legislation.gov.uk/uksi/2025/589/made?utm_source=openai))
## Examples to Illustrate
- If you owe £10,000 VAT and it’s unpaid 16 days after it’s due, you now incur a **3% penalty** (£300), instead of previous **2%**
- If still unpaid 40 days later, the **day 30 penalty** applies, plus the ongoing **10% per annum rate** (prorated daily) on the outstanding balance from day 31
## Compliance & Planning Strategies
- **Pay as close to the due date as possible**: even small delays increase costs substantially.
- Set **payment reminders well in advance** of due dates—aim for at least a week beforehand.
- If you anticipate difficulty, **negotiate a Time to Pay agreement** before deadlines. Those with agreements are typically exempt from the penalty increases. ([gov.uk](https://www.gov.uk/government/publications/increasing-vat-and-other-taxes-late-payment-penalties-percentage-rate-relating-to-penalty-reform/increase-to-vat-and-other-taxes-late-payment-penalties-percentage-rate-relating-to-penalty-reform?utm_source=openai))
- Regularly monitor your VAT and ITSA liabilities to avoid surprises. For ITSA taxpayers, ensure correct estimates and periodic payments to avoid underpayment traps.
- Maintain clean digital records: MTD-compliant software helps track due dates, amounts, and deadlines.
- Seek professional advice if you expect varying liabilities or complex income streams (e.g. mixed UK / foreign income, trusts). There may be nuance in how & when penalties apply, especially for taxpayers newly under the regime.
## Practical Examples for Businesses & Individuals
- **Small business under VAT**: A retailer frequently submits VAT late. After May 2025, she fails to pay on time—she faces an extra 1 percentage point for both 15-day and 30-day late windows, plus the steeper 10% annual penalty for prolonged non-payment.
- **Self-employed with property income** under Making Tax Digital for ITSA: Crosses the income threshold and must maintain digital records. Any delays mean steeper penalties if submitting or paying late.
## Bottom Line
The penalty increases are **not incremental—they are significant**. Understanding the new timeline thresholds (15 days, 30 days, then ongoing), knowing your status under MTD, and preparing ahead are essential to avoid costly penalty exposure. Regular monitoring, early contact with HMRC if there are issues, and professional support where needed will safeguard both your finances and peace of mind.