Taxpayers who missed the January 31 self-assessment deadline are facing escalating penalties and interest. However, could be provided by HMRC as it adjusts the interest rate on in reaction to the Bank of England’s recent base rate cut from 4.75% to 4.5%.
On February 17, the government department made a new move that could benefit 1.1 million customers, with the late payment interest rate dropping from 7.25% to 7%, which includes a 2.5% addition to the base rate. Although this decrease provides some solace, tax expert Andy Wood of Tax Natives has highlighted a noticeable imbalance: “While this drop in HMRC’s late payment interest offers some relief, it’s hardly significant in the grand scheme of things. The real issue is that taxpayers still pay double the interest on late payments compared to what HMRC pays them in refunds. That’s a fundamental imbalance.”
Furthermore, HMRC only rewards a 3.5% interest on tax overpayments, tethered to the base rate minus 1%, but never less than 0.5%, ensuring indebted taxpayers are levied practically twice the rate refunded to those owed.
Taxpayers who were late in submitting tax returns are racking up penalties, with HMRC enforcing a £100 fine for submissions that are up to three months late. The fines increase the longer the delay, hitting dawdlers with substantial costs.
High earners, especially those earning over £150,000 and thus required to file a tax return, will be among the most hit.
For late taxpayers, the penalty starts with a £100 penalty, which after three months, escalates with daily charges of £10 up to a total of £900. After six months, an additional fee of either 5% or £300 is levied, whichever is higher, and this repeats at the one-year mark.
Mr Wood continued: “Beyond financial penalties, the longer a tax bill remains unpaid, the greater the risk of HMRC scrutiny. Late payments can flag taxpayers for further investigation, which can be time-consuming and costly.”
With the current tax year ending in April, savers are encouraged to maximise their fiscal allowances while they can. These include the £20,000 ISA limit and a £60,000 pension allowance for those in the higher-income bracket.
Those who haven’t filed their tax return or settled their tax bill are advised to act swiftly to avoid accruing additional interest and penalties. Mr Wood also advised: “The best course of action is to pay off any outstanding tax as soon as possible. While the interest rate drop provides a small benefit, penalties and potential investigations mean delaying further isn’t worth the risk.”
