In 2025, HMRC is tightening the reins on late filings and payments, with increases in VAT penalties and interest rates for overdue tax bills. Failing to keep up could be more expensive than ever.
…Hint, hint! There are plenty of AI apps to help you keep up to day and compliant!
As a small business owner or contractor, managing your cash flow goes hand-in-hand with understanding your tax obligations.
So, what should you be preparing for?
Here’s a breakdown of the key changes and reminders to help you stay compliant and avoid unnecessary costs in 2025.
1. VAT: New late payment and filing penalties
From January 2023, HMRC introduced a new points-based system for VAT returns. If you’ve not yet adjusted your processes, 2025 is the year to get it right. Under this regime:
Late submission: Points are given for each late return. Once a threshold is reached (based on your submission frequency), a £200 penalty is applied, with an additional £200 for each further late return.
Late payment: Penalties now accrue in two stages:
- Day 16: A first penalty is charged at 2% of the unpaid VAT.
- Day 31: A second penalty kicks in – 2% of what was still unpaid at day 30, plus a daily penalty (4% per annum) until the balance is cleared.
Update from 1 April 2025:
If a VAT liability remains unpaid:
- 15 days or more overdue: A penalty of 3% of the outstanding tax applies.
- 30 days or more overdue: An additional 3% penalty is charged.
- Beyond 31 days: A further penalty of 10% per annum applies until the tax is settled.
This makes timely VAT payments more crucial than ever.
2. HMRC late payment interest increase
The base interest rate for late tax payments is now higher, following Bank of England rate hikes.
As of 2025, late payment interest is set at 7.75% (calculated at base rate + 2.5%). From 6 April 2025, this increased to 8.5%.
This applies to all outstanding taxes including PAYE, VAT, Corporation Tax (CT600), and Self-Assessment.
If you’re planning your cash flow, it’s vital to factor in potential interest charges. Delaying tax payments is now significantly more expensive.
3. PAYE: Miss the deadline, feel the fine
PAYE penalties start with just one missed Full Payment Submission (FPS).
For late submission of FPS, penalties range from £100 to £400 per month, depending on the number of employees.
For late payments, if not settled by the due date (usually the 22nd of the following month), daily interest applies. A penalty of 1% to 4% of the amount paid late may also be charged, depending on frequency of late payments within the tax year.
4. Corporation Tax (CT600) filing and payment penalties
Limited companies must file a CT600 and pay Corporation Tax within nine months and one day after the end of their accounting period. If you miss it:
- Filing penalties:
- 1 day late: £100
- 3 months late: another £100
- 6 months: HMRC estimates your bill and adds a 10% penalty
- 12 months: A further 10% of the unpaid tax
- Late payment: Interest charged from the due date. The current rate (as of April 2025) is 7.75%, rising to 8.5% from 6 April 2025.
5. Self-assessment: Payment on account Due 31 July, 2025
If you’re self-employed or a contractor, don’t forget the second Payment onAccount, due 31 July, 2025.
- Payments on account are advance payments towards your tax bill for 2024/25.
- Each payment is typically 50% of the previous year’s tax liability.
Failing to pay on time triggers interest at 7.75, rising to 8.5% from 6 April 2025:
- Late filing penalty (for missing the 31 January 2025 deadline):
- 1 day late: £100
- 3 months late: £10/day for up to 90 days
- 6 months: 10% of the tax due or £300 (whichever is greater)
- 12 months: An additional 10% or £300
- Late payment penalty:
- 30 days late: 10% of unpaid tax
- 6 months late: Another 10%
- 12 months late: A further 10%
Prevention is cheaper than the cure
With interest rates climbing and penalty structures growing sharper, 2025 could bring unexpected costs if deadlines are missed. The best defence is a good offence. Review your tax calendar now, automate where possible, and speak to your accountant early.
