HMRC collects millions in tax penalties yearly, and the figure is always climbing. Tax penalties and fines in 2023 topped the highest in five years.
Most of these penalties weren’t levied against tax evaders or large corporations. They hit regular business owners, self-employed individuals, and company directors who simply missed deadlines or made honest mistakes.
While that might sound alarming, there’s good news: most tax penalties are entirely avoidable.
Understanding what triggers them is your first line of defence.
Read on to learn everything you need to know about common tax penalties in the UK, and what you can do to avoid them.
Self Assessment Penalties: The Most Common Trap
Self Assessment penalties affect millions of taxpayers each year.
In fact, an astonishing 1.1 million people missed the last filing deadline in 2024 – resulting in an £100 fine.
If you’re self-employed, a company director, or have additional income to report, understanding self-assessment penalties is critical. Here’s how they stack up:
Late Filing Penalties
- A £100 penalty is issued immediately after the 31 January deadline if the Self Assessment tax return is not submitted on time.
- After 3 months, daily penalties of £10 per day are applied, up to a maximum of £900.
- After 6 months, an additional penalty of £300 or 5% of the tax due (whichever is greater) is imposed.
- After 12 months, a further penalty of £300 or 5% of the tax due (whichever is greater) is applied. In some cases, the penalty could be up to 100% of the tax due if the delay is deliberate and concealed.
Late Payment Penalties
- Over 30 days late, a penalty of 5% of the unpaid tax is charged (so anywhere up to 30 days isn’t charged)
- At 6 months, another 5% of the unpaid tax is added.
- At 12 months, a further 5% of the unpaid tax is applied.
Interest Charges
On top of penalties, HMRC charges interest on both unpaid tax and unpaid penalties. As of 26 November 2024, the late payment interest rate is 7.25%.
Guide to VAT Penalties
VAT penalties work differently from Self Assessment. Recent changes have introduced a points-based system that aims to be fairer to occasional late filers while being tougher on persistent offenders.
Late Filing Points
Each late submission earns a point:
- Quarterly returns: The penalty threshold is 4 points
- Monthly returns: The penalty threshold is 5 points
- Annual returns: The penalty threshold is 2 points
Once you hit the threshold, you’ll receive a £200 penalty. Additional late submissions while at the threshold trigger further £200 penalties each time.
You must meet two conditions to reset your points to zero and avoid further penalties.
- First, submit all VAT Returns on time for a specified duration: 24 months for annual returns, 12 months for quarterly returns, and 6 months for monthly returns.
- Second, ensure all VAT Returns from the past 24 months are submitted, even if they were late. Once both conditions are satisfied, your penalty points will be reset to zero.
Late Payment
If you miss the payment itself, you’ll also be charged. VAT payment penalties operate on a percentage basis:
- Up to 15 days late: No penalty.
- 16 to 30 days late: 2% of the VAT unpaid at day 15.
- 31 days or more late: 4%, comprising 2% of the VAT unpaid at day 15 and an additional 2% of the VAT unpaid at day 30.
- From day 31 onward, a second penalty accrues daily at a rate of 4% per annum on the outstanding VAT until paid in full.
Corporation Tax Penalties
Corporation Tax penalties focus on late filing. Late payments are only charged interest. The late filing penalties are as follows:
- Up to 3 months: £100
- Over 3 months: Additional £100
- Over 6 months: 10% of estimated Corporation Tax
- Over 12 months: Another 10%
PAYE and National Insurance Penalties
PAYE penalties hit employers hard because they’re charged per PAYE scheme, not per employee. If you’re running payroll, accuracy and timeliness are crucial.
Late Filing
Employers must submit Full Payment Submissions (FPS) to HMRC on time. Penalties for late filing are based on the size of the PAYE scheme:
- 1-9 employees: £100 per month
- 10-49 employees: £200 per month
- 50-249 employees: £300 per month
- 250+ employees: £400 per month
Only one penalty is charged per PAYE scheme per month, regardless of the number of late submissions. The first late submission in a tax year does not incur a penalty.
Late Payment
Failure to pay PAYE on time results in escalating penalties depending on how many late payments occur within the tax year:
- First late payment: No penalty
- Second late payment: 1% of the amount unpaid
- Third late payment: 2% of the amount unpaid
- Fourth late payment: 3% of the amount unpaid
- Fifth or subsequent late payments: 4% of the amount unpaid
The first late payment in a tax year is disregarded for penalty purposes, but any subsequent late payments will incur penalties as outlined above.
Construction Industry Scheme (CIS) Penalties
CIS penalties often catch out construction businesses because the rules are complex and deadlines strict.
Monthly Returns
- Late submission: £100
- 2 months late: Additional £200
- 6 months late: Additional £300 or 5% of the CIS deductions on the return, whichever is higher.
- 12 months late: Additional £300 or 5% of the CIS deductions on the return, whichever is higher.
For returns more than 12 months late, there may also be additional penalties of up to £3,000 or 100% of the CIS deductions, depending on the circumstances.
Contractor Registration
Failing to register for CIS when you should have can result in penalties equal to 100% of the amount you should have deducted, plus the lost tax and National Insurance.
What HMRC Considers “Reasonable Excuses”
Sometimes, penalties can be appealed if you have what HMRC calls a “reasonable excuse.”
However, HMRC’s view of what’s reasonable is quite specific:
Acceptable excuses include:
- Serious illness or hospital stay
- Death of a partner or close relative
- Computer/software failure while filing
- HMRC service issues
- Fire, flood, or natural disaster
Not accepted as reasonable:
- Lack of funds
- Relying on someone else
- Not receiving a reminder
- Finding the system too difficult
Understand HMRC’s “Failure to Notify”
What if you don’t tell HMRC something they needed to know? This is called “failure to notify“, and it’s one of the most misunderstood penalty systems HMRC operates.
Every year, businesses and individuals face substantial penalties simply because they didn’t tell HMRC about changes to their tax status quickly enough.
For example, if someone starts operating as a sole trader and fails to inform HMRC or register for Self Assessment to report their income, they could face penalties once the oversight is discovered.
Similarly, businesses that exceed the VAT registration threshold but delay notifying HMRC may incur penalties based on the unpaid VAT, even if the delay was unintentional. These scenarios highlight the importance of promptly updating HMRC whenever there are changes to taxable income, business activities, or other relevant tax matters.
Understanding HMRC’s View of Your Behaviour
When HMRC investigates a failure to notify, they first determine whether your behaviour was non-deliberate, deliberate, or deliberate with concealment. This isn’t just about whether you knew the rules – it’s about what actions you took or didn’t take.
Non-deliberate failures happen when you didn’t know you needed to notify HMRC, or when you tried to comply but made a genuine mistake.
For example, if you miscalculated your turnover and didn’t realise you’d crossed the VAT threshold, that’s typically considered non-deliberate.
Deliberate failures occur when you knew you should notify HMRC but chose not to. The distinction between deliberate and non-deliberate isn’t always clear-cut. HMRC might consider it deliberate if you had previous experience with tax obligations or if you ignored advice from an accountant.
The most serious category is deliberate with concealment. This means not only did you knowingly fail to notify, but you also took steps to hide this from HMRC.
This might include keeping two sets of books or deliberately understating your income to stay below notification thresholds.
Reducing Your Penalties Through Cooperation
When HMRC discovers a failure to notify, your behaviour after discovery is scrutinised.
They look at three elements they call “telling, helping, and giving.” Each of these can reduce your penalty significantly.
The “telling” element means being completely honest about what went wrong. Explain why you failed to notify, when the obligation arose, and any circumstances that contributed to the failure. Being upfront can reduce your penalty by up to 30%.
“Helping” means actively assisting HMRC’s investigation. This includes responding promptly to queries, attending meetings when requested, and reconstructing missing records if needed. Good cooperation here can knock up to 40% off your penalty.
The “giving” element refers to providing access to records and information. If you maintain good records and hand them over promptly when asked, you could see another 30% reduction in penalties.
What Happens After HMRC Discovers Your Failure to Notify
Once HMRC identifies a failure to notify, they’ll calculate the “potential lost revenue” – the tax that would have been paid if you’d notified on time.
This forms the base for your penalty calculation. For instance, if you failed to register for VAT, they’ll look at how much VAT you should have charged during the period you should have been registered.
They’ll then write to explain their view of your behaviour and the proposed penalty. At this point, you have the right to challenge both their view of your behaviour and their calculation of the potential lost revenue.
You might have evidence that shows your failure was non-deliberate, or you might disagree with their revenue calculations.
Remember, you have rights during this process. You don’t have to answer questions that might incriminate you, and you can seek professional advice at any point. If you disagree with HMRC’s decision, you can appeal within 30 days.
Protecting Your Business from Tax Penalties With Double Point
While this might all seem quite harsh, HMRC does build in quite a few tolerances for tax mistakes.
However, ultimately, whether it’s a late filing penalty, a VAT registration oversight, or a failure to notify HMRC of changes, each penalty points to gaps in your tax management system.
HMRC collects millions from otherwise compliant businesses that simply missed deadlines or failed to understand their obligations. The system is complex, with penalties that escalate quickly and compound over time.
The good news is that most penalties are entirely preventable with the right systems and support in place. At Double Point, we can support you in keeping your businesses penalty-free through:
- Proactive deadline management and reminders
- Regular reviews of your tax position and obligations
- Clear guidance on when and what to notify HMRC about
- Support with HMRC communications and investigations
- Systems to ensure you never miss a filing or payment
Don’t wait for a penalty notice to review your tax management approach.
Book a consultation with Double Point today, and let’s discuss how we can help keep your business penalty-free and compliant.
