More than 1.3 million taxpayers have been charged interest for failing to meet payment deadlines, with HM Revenue and Customs collecting a substantial £137.5 million in late-payment interest for the 2023/24 tax year. This equates to an average interest charge of just over £100 per individual, though the final total is expected to rise significantly as the figures only include cases where interest or penalties have already been settled.
Escalating Penalties and Historical Context
Revised data for the previous tax year, 2022/23, shows a record £200.1 million was collected from 1.62 million taxpayers, with the average charge reaching £123.52. These figures highlight a growing trend of increased penalties, exacerbated by HMRC's recent decision to toughen late payment interest rates. From April 6, 2025, late payment interest was raised to 4% above the Bank of England base rate, up from the previous 2.5% above base rate, with interest accruing daily on outstanding tax amounts.
Complex Tax System and Allowance Squeeze
Experts attribute the surge in late payments to the increasing complexity of the UK tax system and reductions in allowances, which are drawing more individuals into self-assessment. Charlene Young, a senior pensions and savings expert at AJ Bell, commented, "These latest figures suggest that taxpayers still face difficulty navigating the UK's complex tax system, and HMRC are cashing in as a result." She noted that tax-free allowances for dividends have been significantly reduced, from £5,000 to just £500 since 2018, while income tax rates on dividends have risen, with further increases anticipated for basic and higher rate taxpayers.
Impact on Smaller Investors
The squeeze on allowances is forcing smaller investors to file tax returns for the first time, creating what Young describes as a "perfect storm" that increases bills for existing taxpayers and introduces new complexities for novices. This trend is reflected in the data, with the number of people paying late payment interest fluctuating but remaining high over recent years.
Making Tax Digital: A Major Overhaul
A significant reform of the tax system is on the horizon with the introduction of Making Tax Digital (MTD), set to commence on April 6, 2026. This initiative will require sole traders and landlords earning over £50,000 to submit quarterly online tax updates. The threshold will decrease to £30,000 in April 2027 and further to £20,000 the following year. The government claims MTD will modernise the system and help bridge the tax gap, targeting £780 million by 2028-29.
Administrative Burdens and Software Requirements
Critics warn that MTD will impose additional administrative burdens on millions of small business owners and landlords. Those affected will need to use compatible paid-for software, as HMRC's free filing system will no longer suffice. According to AccountingWEB, 97% of unrepresented taxpayers used HMRC's own system to file returns before the January 31, 2025 deadline, equivalent to 4.5 million returns.
Stricter Penalties Under MTD
Under the current system, taxpayers who miss filing deadlines face an initial £100 fine, with additional penalties for prolonged delays. However, the new MTD regime introduces a more stringent structure. Late payment penalties will be 3% of outstanding tax after 15 days, another 3% after 30 days, and then 10% per year on the unpaid balance from day 31 onwards. Late submissions will also trigger a penalty points system, with fines issued once a taxpayer accumulates four points.
Potential for Higher Bills
Ms Young cautioned that despite MTD's aim to improve compliance, some individuals could end up paying more. "Although the penalty points system could prove fairer when it comes to mistakes, people could face higher bills under MTD for late payment of money owed due to the new penalties," she explained. For example, a self-employed person owing £25,000 in income tax could see their bill rise to approximately £26,900 after four months under the existing system, but nearly £28,000 under the new regulations.
While these changes may help HMRC clamp down on unpaid tax, it remains uncertain how easily business owners will adapt and whether HMRC will financially benefit from low engagement with the new system. The ongoing challenges in tax compliance underscore the need for greater awareness and support for taxpayers navigating an increasingly complex landscape.
