Penalties for late payment of self-assessment tax
The penalties for late payment are different for each tax.
For self-assessment, the standard penalties are:
- 30 days late – 5% of the tax owed,
- 6 months late – a further 5% of the tax owed,
- 12 months late – a further 5% of the tax owed.
Sometimes these penalties can be avoided by speaking to HMRC before the tax deadline and explaining why you cannot pay. They can also be appealed and may be written off where the taxpayer has a reasonable excuse for failing to pay on time.
Self-assessment tax is paid by individuals who have to submit an annual tax return to HMRC. There are three payment deadlines for each tax year (the tax year is 6 April to 5 April):
On 31 January during the tax year, a first payment on account is due to HMRC. It is 50% of your estimated tax bill.
On 31 July, after the tax year has ended, a second payment on account is due. This one is also 50% of your estimated tax bill.
On 31 January after the tax year has ended, a final payment is due. The amount due is the difference between your total tax and the payments on account you have already paid.
I cannot pay my tax due to coronavirus. What can I do?
HMRC have already allowed tax payers to delay their 31 July 2020 payments on account to 31 January 2021. This was automatically granted and taxpayers did not need to tell HMRC that they were delaying payment.
This means that for those who have delayed payment during 2020, the balance of tax for 2019/20 will now fall due on 31 January 2021. For self-assessment debts of less than £30,000 there is an online form to apply for a further extension to this tax deadline. This will spread the payment due over the following year.
You must take action, if you do not inform HMRC that you cannot pay by 31 January 2021 then the normal payments are expected to be enforced.
Other taxpayers, or for debts larger than £30,000 you can call HMRC to discus alternative payment arrangements.
Other tax deadlines
There are many different taxes that business owners have to pay. Each has different deadlines and different penalties for late payment.
This is paid by companies. It is due for payment 9 months and one day after the company’s year-end, or quarterly for large companies. There are no penalties for late payment of Corporation tax.
Paid by businesses, this can be companies or sole traders. It is usually due quarterly, but sometimes monthly. The deadline for payment is one month and seven days after the end of each VAT period.
The penalties for late payment of VAT (or submitting your VAT Return late) can be high and the rules are complex. The penalties start at 0% but quickly increase to 15% of the tax due.
PAYE and CIS
Paid by businesses who have employees, or construction industry sub-contractors. It is usually payable monthly, by the 22nd after the end of the tax month. Penalties for late payment of PAYE range from 1% to 4%, depending on how many payments have been missed.
Since the penalties are different for each tax, business owners who are struggling sometimes choose to prioritise paying the taxes with the highest penalties.
Interest rates with HMRC
Interest will also be due on late payment of any taxes. From 7 April 2020 the rate of interest on late payments is 2.6%.
HMRC will pay you interest if you pay your tax early or if you overpay. The rate is 0.5%, which is much lower than the rate they charge taxpayers for late payments. Even though it is a low rate, some may find that this is a better than they would get if they left the money with their bank.
HMRC write to late tax payers to notify them of the missed payment and the penalty being charged. They will tell you how to pay and what to do if you do not agree with HMRC’s decision to charge you.
HMRC expect penalties to be paid within 30 days of getting the notice.
HMRC use the postal system to inform you of penalties, so it is important to ensure HMRC have your correct address on their file, otherwise you might not know that you have been issued with a penalty.
Avoid penalties by agreeing more time to pay
Penalties are only charged on overdue taxes, so the most straight forward way to avoid penalties is to pay on time. When this is not possible, taxpayers can speak to HMRC who might agree to alternative arrangements for the payment.
To seek alternative arrangements:
- Contact HMRC as soon as possible. How you contact them depends on what you owe.
- Make sure your returns are up to date. HMRC have been more likely to make an agreement when the tax returns have all been submitted and they know exactly what you owe.
- Expect to be questioned. Agents normally ask why you do not have enough money to pay the tax, they want to know what other methods of payment you may have available to you.
- Know what you can afford to repay. Know in advance how much you will be able to repay, taking in to account future taxes as well. Repayment plans can be cancelled by HMRC if payments are missed or if future taxes are not paid on time.
If you can come to an alternative agreement, expect to be asked to set up a Direct Debit for its payment. This will cover the overdue taxes only and future taxes must be paid as normal.
Contact us if you need help with working out what you owe to HMRC, or with seeking alternative payment arrangements.
When no alternative arrangement has been reached
When additional time to pay has not been agreed, taxpayers should consider making the payments that they can afford.
This may not be appropriate when insolvency is likely because a company is unable to pay what it owes to HMRC or other creditors. Further advice should be taken in this situation.
When paying overdue debts, consider how much is owed for each tax, the penalties that will be due and the action that HMRC normally takes on enforcement. For example, HMRC often pursue VAT and PAYE debts more actively than corporation and income tax. Therefore, HMRC may be more willing to agree an alternative arrangement for income taxes if VAT and PAYE are up to date.
Who do I contact to set up a payment plan with HMRC?
There are different ways of setting up a Time to Pay or alternative payment agreement with HMRC and they depend on the tax due and how much is owed.
At the moment, agreements for Self Assessment tax of less than £30,000 can now be made online, without contacting HMRC by phone. If you are not eligible for the online application, call the Self Assessment Payment Helpline on their website.
For other taxes, how you contact HMRC depends on whether they have contacted you already. Letters from HMRC will often have a number on for you to call to discuss the late payment. Otherwise, call the Payment Support Service.
Tax payments can be made by telephone, online or by bank transfer. Some taxes can be paid by Direct Debit, which is a great way to avoid missing payment deadlines so long as you submit your tax return on time.
HMRC have a detailed webpage listing all of the different ways to pay. For each tax, you must make payment to the correct bank account and use the correct payment reference.
HMRC no longer accept tax payments by personal credit card, but do accept payment by personal debit card or corporate credit card.
When a debt is overdue, HMRC will sometimes ask a third party debt collection agency to collect payment on their behalf. Payment can be made to these agencies, but you should consider the authenticity of their communication before making payment or giving them any personal details.
Scam payment requests and suspicious letters
If you have been contacted about a late payment but are suspicious of its authenticity, you can:
- Check online by signing in to HMRC’s website
- Seek a telephone number directly from HMRC’s website (hmrc.gov.uk) to call and ask for them to confirm what you owe
- Ask your accountant to double check the amount owed against their records.
HMRC have given examples of scam contacts and signs to look out for. If you are in doubt, do not give out any personal details or make payment.
Planning for your tax payments is an effective way to avoid the stress of not being able to make payments on time. I advise clients to:
- Estimate the bill straight away. From day one you can make a guess at what you will owe. Decide upon a sensible percentage and make an estimate. It may not be accurate, but at least you know roughly what you will be paying.
- Set aside money for tax payments, all the time. Some businesses use separate bank accounts to make this easier. I have seen this work very well for ensuring that there is money for tax, payroll and even for paying owners their dividends. Regularly transfer money to one side to so that it does not impact your every day spending decisions.
- Calculate your tax bill as soon as you can. Even if you are not going to pay straight away, know how much you need to set aside.
HMRC do charge penalties and interest on late payments, but this can be avoided. Plan ahead and act as early as possible.
If you would like more help with avoiding these charges then contact our team for help with understanding what you owe and what can be done about it.