How are the Penalties for Late Self-Assessment Tax Returns and Payments Changing?

In a bid to reform the system of penalties for late submission of tax returns and late payment of tax, the government is introducing significant changes. This comprehensive guide will walk you through these upcoming modifications to penalties for Income Tax Self-Assessment (ITSA).

Understanding Current Penalties

Before we go into the changes, it’s essential to grasp the existing penalties for late self-assessment returns and late tax payments:

1. One day late: A fixed penalty of £100 is automatically applied, even if no tax is due or if the tax owed has been paid on time.
2. Three months late: A charge of £10 per day, up to a maximum of £900, accumulates over 90 days.
3. Six months late: A penalty of £300 or 5% of the tax due, whichever is higher, is imposed.
4. 12 months late: Again, a penalty of £300 or 5% of the tax due, whichever is higher, applies.

Should information be deliberately withheld or concealed for more than 12 months, additional penalties may be incurred.

For late payment of tax, the current rules dictate:

• 30 days late: A penalty of 5% of the tax due.
• Over five months after the first penalty: 5% of the outstanding tax due at that date.
• Over 11 months after the first penalty: 5% of the outstanding tax due at that date.

Why Has the Government Changed the Penalties?

The government initiated this reform of sanctions for late submission and late payment as part of the Spring 2021 Budget announced by then-Chancellor Rishi Sunak. This change heralds a shift towards a points-based system and will initially affect VAT and Income Tax Self-Assessment (ITSA).

An HMRC spokesperson explained the reforms, stating, “We are reforming penalties to make them fairer, more effective, and consistent across taxes with the focus on taxpayers who persistently miss filing and payment deadlines, rather than those who occasionally slip up.”

When Will the Penalties Change?

The new penalty system for late VAT returns and payments has already been implemented. For self-assessment, it will come into effect in April 2026.

This change is closely tied to the phased introduction of Making Tax Digital (MTD) for Income Tax Self-Assessment (ITSA). MTD mandates businesses, self-employed individuals, and landlords to maintain digital records and use MTD-compatible software for HMRC submissions.

For those with an income exceeding £50,000, this requirement starts in April 2026, while it extends to those with an income exceeding £30,000 from April 2027.

For smaller businesses below the £30,000 threshold, the government has expressed its commitment to reviewing their needs and exploring how the Making Tax Digital for Income Tax Self-Assessment service can be tailored to suit them better.

How Will the New Late Submission Penalties Work?

Under the new system, each missed self-assessment tax return submission deadline accrues penalty points. Once a specific points threshold is reached, a £200 penalty is levied. Subsequent late submissions will also incur a £200 penalty, but the taxpayer’s points total will remain unchanged.

The penalty thresholds are categorised by submission frequency:

• Annual returns: 2 penalty points threshold
• Quarterly returns: 4 penalty points threshold
• Monthly returns: 5 penalty points threshold

Once a penalty threshold is reached, points are reset to zero if all returns are submitted on time during a “period of compliance.” These periods of compliance are as follows:

• Annual: 24 months
• Quarterly: 12 months
• Monthly: 6 months

How Will the New Late Payment Penalties Work?

The new late payment penalty system consists of two stages:

1. A first penalty, which applies when the payment remains overdue by 16 or more days, is 2% of the tax due after day 15.
2. A second penalty, incurred when the payment is 31 or more days overdue, amounts to 2% of the tax outstanding after day 15 plus 2% of the tax outstanding at day 30.

The Benefits of Filing Early

To avoid penalties, it’s crucial to file your tax return and pay your taxes on time. However, filing early offers additional advantages, including:

• The potential for a tax refund due to various reasons, such as excessive payments on account based on the previous year’s income. Filing early expedites the processing of any refunds you may be owed.
• Effective cash flow management for your business. Knowing your tax bill well in advance allows you to plan for timely payments.
• More time to focus on growing your business when your tax return is out of the way.

How DabHand Accounting Can Assist You

At DabHand Accounting, we specialise in helping you complete your tax return early. This ensures you know the exact amount of tax due and when it needs to be paid.

If you anticipate a tax refund, it’s in your best interest to receive it as soon as possible. Our expertise extends to self-employed individuals and business owners, and we can provide you with the assistance you need.

For guidance on your self-assessment affairs, don’t hesitate to give us a call today on 0203 161 8969 or via email at cd68@cd68.co.uk.