The penalty regime as it stands
For VAT and for those inside Making Tax Digital for Income Tax, late payment penalties work in stages from 1 April 2025:
Nothing for the first 15 days. At day 15, a penalty of 3% of the outstanding tax. At day 30, another 3%. From day 31, a further penalty accrues daily at an annualised 10% for as long as it remains unpaid.
The first 15 days are the important part and almost nobody knows about them. Pay within a fortnight of the due date and there is no penalty at all. That is a genuine grace period, and it means a short cash flow gap need not cost you anything.
Interest is separate, and it is not cheap
Interest runs alongside the penalties, not instead of them. HMRC late payment interest is 7.75%, and it has been at that level since 9 January 2026. The formula is the Bank of England base rate plus 4%.
Note the asymmetry, because it tells you something. If HMRC owes you money, the repayment rate is 2.75%, being base rate minus 1%. You pay 7.75% when you are late. They pay 2.75% when they are. The spread is 5 percentage points.
At 7.75%, HMRC is a more expensive lender than most business overdrafts. Anyone treating an unpaid tax bill as cheap working capital has the arithmetic backwards.
It is getting tougher again in 2027
Two changes are coming that are worth planning for. Within Making Tax Digital for Income Tax, the day 15 and day 30 penalties are due to rise from 3% to 4% each from 2027/28. The 10% annualised charge from day 31 is not changing. HMRC has published those figures for Making Tax Digital, so treat them as confirmed there rather than assuming they read across to VAT.
Separately, the reformed penalty regime extends to people who file a normal self assessment return and are outside Making Tax Digital, from April 2027. So it reaches you whether or not you ever join MTD. Note that late filing and late payment are two different systems: filing penalties are points based, payment penalties are the percentages above.
What to do if you cannot pay
Talk to HMRC before the deadline. A Time to Pay arrangement is an ordinary, well used facility, not an admission of failure. Agreeing one before you default stops further late payment penalties accruing, provided you keep to it. Interest still runs.
Do not simply not file because you cannot pay. Filing and paying are separate obligations with separate penalties, and not filing turns one problem into two.
File early even when you pay late. Knowing the number in May and paying it in January is a far better position than discovering it in January.
Common questions
Can I appeal a penalty?
Yes, if you have a reasonable excuse. Serious illness, a bereavement, or a genuine service failure by HMRC may qualify. Not having the money generally does not, unless the reason you do not have it was itself unforeseeable.
Figures reflect HMRC guidance as at July 2026, including the interest rate set on 9 January 2026. Rates move with the base rate, so check the current figure before relying on it. If you are behind, get in touch sooner rather than later.
Related services and guides
Deadlines & penalties Bookkeeping service Self Assessment service