The current standard £100 fine for late filing of self assessment tax returns is due to be changed to a points-based system from 2026
HMRC has confirmed that the penalty system will be reformed in a bid to curb abuse of the self assessment system and support taxpayers who make occasional mistakes.
The planned penalty reforms for paying tax late will be based on the length of time the tax is outstanding but will only affect the 5% of non-compliant taxpayers.
The earlier an overdue tax payment is made, the lower the penalty charge will be.
An HMRC spokesperson said: ‘We are reforming penalties so taxpayers who occasionally miss the filing deadline will not face financial penalties. Instead we will focus on those who persistently miss filing and payment deadlines.’
The planned penalty reforms for sending in a tax return late will be based on points. Taxpayers who miss a filing deadline will initially be given a point, with a financial penalty being charged only once a set number of points is reached.
This approach recognises that taxpayers who occasionally miss deadlines should be encouraged to comply with filing obligations, rather than immediately being charged a penalty.
For example, a payment made within 30 days will have a lower penalty charge than one made after 30 days. This design encourages those that can pay to do so, while taking appropriate action against persistent non-compliance.
The rule change is expected to raise £155m in penalties according to the Budget Red Book calculations issued in March 2023.
The new penalty regime will penalise the minority who persistently do not comply by missing filing and payment deadlines, while being more lenient on those who make the occasional slip-up.
‘We support all taxpayers to get their tax right, and through HMRC’s extensive advertising and supportive approach 95% of customers now pay their tax on time,’ said the HMRC spokesperson.
These reforms already apply for VAT. However, in December 2022 the government announced businesses within scope of Making Tax Digital (MTD) for Income Tax would have more time to prepare for its introduction, with MTD to be phased in from April 2026.
It was also announced that the reforms to penalties would come into effect for these taxpayers when they become mandated to join MTD (instead of in 2024).
Some income tax taxpayers will remain within the existing late filing and late payment penalty rules for longer, which was reflected in the spring Budget estimate.