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The Penalty For Paying Your Tax Late Has Doubled Under MTD

ended 07. July 2026

Being a little late with your tax now costs far more than it did a couple of years ago, and this is a charge for lateness itself, separate from the tax you owe and from late-payment interest. Under the harmonised late-payment penalty regime now in force for VAT, and phasing in for Income Tax Self Assessment as Making Tax Digital rolls out, a first penalty of 3% of the tax still unpaid at day 15 is followed by a further 3% of whatever is still unpaid at day 30, so 6% by day 31. From day 31 a second penalty then accrues daily at an annualised 10% a year until the bill is cleared.

Here is the catch. These are penalties, not interest, and they have been quietly raised. The old regime charged 2% and then a further 2%, up to 4%, with a second penalty running at 4% a year, so the day-31 ceiling has gone from 4% to 6% and the second penalty rate from 4% to 10% a year, more than doubling. The government confirmed at the Autumn Budget 2025 a further increase from the 2027 to 2028 tax year: the first penalty rises from 3% to 4% at both day 15 and day 30, lifting the day-31 ceiling from 6% to 8%, while the second penalty stays at 10% a year. The same 3% to 4% first-penalty rise applies to VAT from April 2027. In other words, the increase falls on the fixed first penalty for being late, not across the board.

It lands at an awkward moment. The second Self Assessment payment on account is due on 31 July 2026, and MTD for Income Tax, mandatory from 6 April 2026 for those with combined self-employment and property income over £50,000, is pulling hundreds of thousands more sole traders and landlords into this regime. The people most exposed are not deliberate defaulters but the self-employed, small firms and landlords who hit a cashflow gap and pay a few weeks late.

  1. Is sharpening the penalty for lateness, on top of the tax and the interest, a sensible way to improve compliance, or does it punish cashflow problems more than wrongdoing?
  2. With MTD sweeping far more sole traders and landlords in, who is hit hardest by a 6% charge by day 31, rising to 8% from 2027, and a 10%-a-year penalty on top, and is that proportionate for a genuine cashflow slip?
  3. What should people do now to stay clear of these penalties, especially before 31 July? Do you have a client whose plans this would change? If so, please give as much colour and detail as possible.

5 responses from the Newspage community

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Editor
Harvey Dhillon
Founder & CEO at Zmartly
Fall 15 days behind on your VAT or Self Assessment and the charge is 3 per cent, rising to 6 per cent by day 31, then 10 per cent a year until cleared. These are penalties for lateness, separate from the tax and the interest, and they have been sharpened: not long ago the figures were 2 and 4 per cent. Put that 6 per cent into annual terms and a short delay costs about 70 per cent a year, nearly twenty times the Bank of England base rate of 3.75 per cent, and dearer than any high-street lender. That is the shape of short-term, high-cost credit, charged on a cashflow slip. The one caught is rarely a deliberate defaulter, but the self-employed owner or one-flat landlord who hits a slow month, and Making Tax Digital is pulling far more of them in. So treat the 31 July payment on account as fixed: if your income has fallen, apply to reduce it rather than miss it, and if cash is short, file and ask HMRC about Time to Pay before day 15. The clock starts whether you call or not.
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Samuel Mather-Holgate
Managing Director & IFA at Mather and Murray Financial
This is less a gentle nudge and more a tax trap with teeth. HMRC is already charging interest on late tax, so stacking harsher penalties on top risks hammering people with short-term cashflow problems rather than deliberate dodgers. The hardest hit will be sole traders, small firms and landlords who are solvent on paper but waiting on invoices, rent or seasonal income. A 6% charge by day 31, rising to 8%, is brutal if someone is only a few weeks late. With 31 July looming, people should not bury their heads in the sand. File on time, pay what you can, keep cash aside for tax before anything else and speak to HMRC early if you need a Time to Pay arrangement. The real danger is thinking “a bit late” is still cheap. It isn’t.
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Editor
Tony Redondo
Founder at Cosmos Currency Exchange
The new regime acts as a blunt cashflow punishment rather than a compliance tool. Devised by policymakers insulated from private sector realities, it strips away the vital working capital buffer small businesses rely on. By treating temporary trade deficits as offenses, it enforces a brutal 3% penalty at day 15, doubling to 6% by day 30 (8% from 2027), plus a 10% annualised charge from day 31 on top of base-rate interest. This disproportionately hits small landlords, freelancers, and sole traders newly swept into MTD, whose irregular incomes make a 6% day-31 spike entirely punitive for a genuine cashflow slip. To stay clear before 31 July, taxpayers must abandon inertia. They must build aggressive tax reserves, use real-time bookkeeping to dispute inflated HMRC forecasts, and secure Time to Pay arrangements before day 15 to lock out penalties. For clients facing unexpected void periods or repairs, these rules force an immediate pivot from quiet delay to proactive structural defence.
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Nouran Moustafa
Practice Principal & IFA at Roxton Wealth
There is a huge difference between “won’t pay” and “cannot pay this month”. A 6% penalty by day 31, followed by a daily charge at 10% a year, risks making that distinction invisible.

This is a tax-system poverty premium. The people most exposed are not necessarily trying to dodge tax; they are sole traders waiting on invoices, landlords paying for a boiler before rent lands, and small-business owners choosing payroll over their own drawings. Their income is uneven, but HMRC’s deadlines are not.

Making Tax Digital should help people see a bill coming, not make a difficult month more expensive. Before 31 July, people should check whether their payment on account genuinely reflects a lower-income year, keep a tax buffer where possible and contact HMRC early if payment will be difficult. A Time to Pay arrangement is sensible financial management—not an admission of failure. Silence is what becomes expensive.
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Colette Mason
AI Ethics Consultant at Clever Clogs AI
This penalty regime treats a cashflow slip the same way they treat deliberate non-compliance. As the MTD threshold drops, that assumption lands on exactly the people least equipped to absorb it. It is a convenient disguise for a regressive tax by any other name.