New HMRC penalty rules 2025: How to avoid fines for late tax returns

The year 2025 brings significant changes to HMRC penalty rules. These updates aim to encourage timely tax submissions and payments while ensuring fairness.

However, the penalties for non-compliance can be costly. To avoid fines, taxpayers must understand the new rules and take proactive steps.

This guide explains the HMRC penalty rules 2025 and provides strategies to stay compliant.

What are the new HMRC penalty rules 2025?

The new HMRC penalty appeal process regime introduces stricter measures for late submissions and payments. These changes are part of the Making Tax Digital (MTD) initiative, which focuses on improving compliance.

Key features of the HMRC penalty rules 2025

1. Late Filing Penalties
   • An initial £100 fine is imposed if a tax return is late, even if no tax is due.
   • If the return remains outstanding for more than three months, daily penalties apply. From April 2025, this penalty is £20 per day, up to a maximum of £1,800 (previously £900).
   • At six months, an additional penalty of 6% of the outstanding tax or £400 (whichever is greater) is charged.
   • After 12 months, further penalties apply, especially for deliberate delays. (Check: Late Tax Return Help for Individuals)
2. Late Payment Penalties
   • For late tax payments, the new rules introduce a staged penalty system:
     • No penalty if payment is made within 15 days.
     • 3% penalty if unpaid after 15 days.
     • Additional 3% if unpaid after 30 days.
     • 10% per annum penalty if unpaid beyond 31 days, compounded annually.
3. Late tax return fines 2025
   • 0–15 Days Late: No penalty if payment is made or a payment plan is arranged within this period.
   • 16–30 Days Late: A 3% penalty on the amount outstanding at day 15 applies (previously 2%).
   • 31 Days or More: A second penalty of 3% on amounts outstanding at day 30 is added, plus daily interest at an annual rate of 8.5% (up from 4%).
   • From April 2025: Late payment penalties are cumulative and significantly higher. The penalty structure is:
     • 3% at day 15,
     • Additional 3% at day 30,
     • 10% annual rate from day 31, compounded annually.
   • Longer delays now result in substantially higher penalty amounts due to the increased rates and compounding interest.
     (These changes apply to both VAT and Income Tax Self-Assessment (ITSA) taxpayers, with interest rates aligned to the Bank of England base rate plus 4%.)
4. Interest Rate Increase
   • The interest rate on unpaid taxes will rise from 7.25% to 8.75% starting April 2025.
   • From 6 April 2025, HMRC’s late payment interest is set at the Bank of England base rate plus 4%, making delays increasingly expensive.

Also Read: Corporation Tax Return Filing Support

Why have these changes been introduced?

• The new HMRC penalty system aims to reduce the tax gap by encouraging timely compliance and deterring persistent non-payment.
• In the financial year 2023/24, HMRC collected a record £1,169 million in penalties, largely due to increased enforcement and crackdowns on fraud.
• Early figures for 2024/25 show a 31% drop in penalty revenues compared to the previous year, which may reflect either improved taxpayer compliance or a temporary leniency in enforcement.
• The government has confirmed a “soft landing” for those joining Making Tax Digital for Income Tax from April 2026, with penalties waived for the first year of compliance. This is designed to ease the transition and encourage adoption of digital tax filing.

These reforms are part of a broader push to modernize tax administration and ensure fairness, while also supporting taxpayers during the shift to new digital requirements.

Understanding late submission penalties

HMRC has introduced a points-based system for late submissions:

• Taxpayers receive one point for each missed deadline.
• Once a threshold is reached (e.g., four points for quarterly submissions), a £200 fine is issued.
• Additional £200 fines apply for every subsequent late submission while points remain above the threshold.

Thresholds based on submission frequency

Resetting points

Points can be reset to zero if taxpayers meet two conditions:

1. Complete a compliance period (e.g., submit all returns on time for 12 months for quarterly filers).
2. File all outstanding returns before the reset.
3. Points expire after a period of good filing behaviour: 12 months for quarterly filers, six months for monthly filers, and 24 months for annual filers. During this period, all returns must be submitted on time.

Late payment penalties are calculated based on how long tax remains unpaid:

How to avoid HMRC penalties?

From April 2025, the first late payment penalty is 3% at day 15, increasing to 6% at day 30, and a 10% annual rate from day 31. Penalties will stop accruing if a Time To Pay agreement is reached.

Also Read: Corporate Tax Payment Support Services for Small Businesses

Tips to avoid late payment penalties

1. Pay your tax bill as soon as possible after filing your return.
2. Set up a direct debit to ensure payments are made automatically by the deadline.
3. If you cannot pay in full, contact HMRC early to arrange a “Time to Pay” agreement.

Penalties are waived for the first year of MTD compliance for new participants, easing the transition for those joining the scheme in 2026 and beyond.

Reasonable excuses and appeals

HMRC allows taxpayers to appeal penalties if they have a reasonable excuse for missing deadlines. Examples include:

• Serious illness or hospitalization preventing timely submission or payment.
• IT failures when filing online through HMRC’s portal.
• Natural disasters such as floods or fires affecting records or operations.

Appeals must be submitted within 30 days of receiving the penalty notice.

HMRC may reduce or not enforce a penalty if there are special circumstances, known as ‘special reduction’.

Also Read: Appeal Your HMRC Penalty with expert Self Assessment Tax Accountants

What To Do Before You Appeal

• Ensure all late returns and outstanding tax payments are filed/settled.
• If you cannot pay immediately, set up a payment plan (“Time to Pay”).
• Gather all supporting evidence for your reason before submitting your appeal.
• Organize your documents and create a summary timeline of actions taken.

Also Read: Complete Corporate Tax Return Services for Businesses

Common Mistakes That Cause Appeal Rejection

• Using personal accusations or emotional arguments in your submission.
• Submitting generic excuses without specific supporting documents.
• Missing the 30-day deadline for appeals without explanation.
• Not resolving all outstanding returns or payments before appealing.

What Evidence Does HMRC Need for Your Appeal?

• For illness: Provide medical letters (with specific dates) or hospital discharge summaries.
• For technical issues: Supply screenshots with visible timestamps and error messages.
• For bereavement: Attach death certificates or funeral correspondence.
• For postal delays, fires, or theft: Include official verification or insurance reports.
• Evidence from banks or professionals (e.g., solicitors) strengthens your case.
• Each document should directly reference the period in which the deadline was missed.

How to Prepare and Submit an Appeal (Step-by-Step)

• Gather your penalty notice, Unique Taxpayer Reference (UTR), full name, and address.
• Note the penalty amount and reason stated by HMRC.
• Draft your appeal with a professional, factual tone. Avoid emotional language.
• Clearly explain specific circumstances with dates and details.
• State that you are requesting cancellation due to a “reasonable excuse.”
• Attach relevant supporting evidence (medical certificates, technical error logs, etc.).
• Use HMRC’s official appeal form (SA370) for postal appeals or the online portal as appropriate.
• Submit the appeal within 30 days of the penalty notice date.
• Keep copies of all correspondence and evidence for your records.

Also Read: Corporation Tax Filing Help for Businesses

How businesses are affected by MTD rules in 2025?

Making Tax Digital (MTD) continues to expand in scope:

1. From April 2024, businesses with income over £10,000 must file through MTD software.
2. From April 2025, all other self-assessment taxpayers will also be required to comply with MTD rules.

Businesses that fail to adapt may face increased penalties under the new regime.

1. In the financial year 2018/19, HMRC collected £753m in penalties from taxes and duties (excluding National Insurance). This dropped to £447m during Covid but rebounded to £762m by 2022/23.
2. The bumper year of 2023/24 saw penalties surge by 53%, reaching £1,169m, largely due to enforcement around Covid support schemes and offshore non-compliance disclosures.
3. Early figures for April-August 2024 show a year-on-year decrease of £161m in penalty revenues, a potential sign of improved taxpayer compliance or leniency from HMRC.
4. From April 2026, new MTD participants will have penalties waived for their first year of compliance, helping ease the transition to digital reporting.

Practical steps to stay compliant under new rules

1. Understand Your Deadlines: Mark key dates like self-assessment filing (31 January) and corporation tax return deadlines (12 months after your accounting period ends).
2. Use Digital Tools: Invest in MTD-compatible software such as QuickBooks or Xero to automate calculations and submissions.
3. Prepare Early: Gather all necessary documents well before new UK tax return deadlines, including income statements and expense records.
4. Monitor Payments: Set reminders for due dates and use direct debit where possible.
5. Seek Professional Help: Consult accountants or tax advisors who specialize in compliance with HMRC regulations.

Also Read: Bookkeeping Services for MTD Compliance

What Happens After You Submit Your Appeal?

• HMRC typically reviews appeals within 30–45 days.
• If more information is needed, HMRC will contact you for clarification.
• If your appeal succeeds, the penalty will be cancelled and any payment refunded (including applicable interest).
• If rejected, you may escalate to the tax tribunal within 30 days.

Who can help me with my appeal?

You can go for help, there are many options:

• Accountants and tax professionals: These people can help you to draft an appeal, cross verify all the paperwork and coordinate with HMRC.
• Tax charities:
  • TaxAid (for those on low incomes)
  • Tax Help for Older People
• Citizens Advice: You can also seek citizens advice to get free guidance on HMRC penalties and appeal.
• Legal specialists: Some law firms and tax solicitors also offer services for complex or disputed penalty appeals.

Conclusion

The updated HMRC penalty rules in 2025 emphasize timely compliance with tax regulations through stricter measures for late filings and payments.

By understanding these changes and adopting proactive strategies such as using digital tools, setting reminders, and seeking professional advice when needed, taxpayers can avoid unnecessary fines while staying compliant with UK tax laws.

With interest rates rising, stricter enforcement, and a soft landing for new MTD participants, now is the time to ensure your processes are robust and error-free.

Ready to take the next step? Email: [email protected] or call us at 01923 856 008 to speak with our team today.

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