Compliance
Compliance Simplified: Avoiding Penalties with the New Late Payment Regime and MTD Rules
From April 2025, late payment penalties become tougher under Making Tax Digital for VAT and Self Assessment; taxpayers and advisers need to understand the timing and behaviour impacts.
By NomadicTax Research Team • 5-8 min read • November 22, 2025
## What’s Changing: Late Payment Penalties & Making Tax Digital (MTD)
In the **Spring Statement 2025**, the UK government increased late payment penalties for **VAT** and **Income Tax Self Assessment (ITSA)** taxpayers as they join **Making Tax Digital** (MTD). These changes start from **6 April 2025**. ([gov.uk](https://www.gov.uk/government/publications/spring-statement-2025-document/spring-statement-2025-html?utm_source=openai))
The new rules are:
- A **3% penalty** on any outstanding tax where owed by **15 days** late.
- Another **3% penalty** where tax remains unpaid by **30 days** late.
- For overdue amounts of **31 days or more**, a **10% per annum** penalty rate. ([gov.uk](https://www.gov.uk/government/publications/spring-statement-2025-document/spring-statement-2025-html?utm_source=openai))
## Who Is Affected?
- VAT-registered businesses already within the MTD regime.
- Self-employed individuals and **landlords** with trading or property incomes over **£50,000** per year; this will drop to lower income thresholds in later years. ([ft.com](https://www.ft.com/content/7c3cf3a0-8dc3-4a6f-83d5-c84d4f8aa50d?utm_source=openai))
- Those who join MTD, and so are subject to digital filing and online reporting requirements.
## Avoiding Penalties: Best Practices
- **File and pay on time** every period. The earlier deadlines may be tighter under MTD.
- **Use compatible software** and ensure filings are correctly submitted. Technical failures are not usually grounds for penalty relief.
- If payment delay unavoidable, engage HMRC proactively; in some cases, reasonable excuse may help avoid penalties.
- Maintain clear records of income, VAT, and expenses, especially for landlords and those with marginal trades crossing thresholds.
## Example Scenario
Suppose Beth is a self-employed graphic designer earning £60,000/year, now subject to ITSA under MTD.
- Her ITSA return and tax due £5,000 for 2025 needs to be paid by 31 January following the tax year. If she misses payment by 20 days (i.e. by 20 February), a 3% penalty applies at 15 days. By day 30 missed (1 March), another 3%. From 31 days on, interest and a further penalty escalate yearly.
## Further Digitalisation & Thresholds
- MTD for ITSA will require those with **trading or property income over £20,000** from **6 April 2028** to join. ([gov.uk](https://www.gov.uk/government/publications/supporting-documents-for-spring-statement-2025/spring-statement-2025-policy-costings?utm_source=openai))
- HMRC is simplifying Self Assessment reporting thresholds—aligning various income types and reducing the number of people required to file, by raising thresholds or introducing a new digital reporting service. This will remove Self Assessment obligation for many small-income taxpayers. ([gov.uk](https://www.gov.uk/government/publications/summary-of-tax-update-spring-2025-simplification-administration-and-reform/tax-update-spring-2025-simplification-administration-and-reform-summary?utm_source=openai))
## Action Plan
1. **Assess whether you fall into MTD or late filing regimes**, based on income type and levels.
2. **Budget for software/tools** – digital records are essential.
3. **Open a dialogue with professionals** if nearing thresholds or expecting irregular income.
4. **Set reminders** and calendar deadlines—late penalties escalate fast from 15, 30, and beyond.
By understanding the escalated penalties and embracing digital reporting, individuals and businesses can reduce risk, avoid unexpected costs, and stay compliant under the new regime.