New HMRC penalty rules 2025/26: How to avoid fines for late tax returns

From April 2025, HMRC introduced its most significant overhaul to the late penalty regime in over a decade. Penalty rates have increased, interest is now compounded, and the Making Tax Digital (MTD) programme continues to expand. Whether you are self-employed, a landlord, or run a limited company, the cost of missing deadlines is now considerably higher.

This guide explains every key change under the new HMRC penalty rules, what the current rates are as of early 2026, and practical steps you can take to avoid fines altogether.

This article was originally published in April 2025 and last updated on 15 March 2026 to reflect the latest HMRC penalty rates.

What Are the New HMRC Penalty Rules 2025/26?

The updated regime introduces two separate penalty systems: one for late submission of returns, and one for late payment of tax. Both have become stricter. Here is a breakdown of each.

1. Late Filing Penalties (Self Assessment)

The penalty structure for late Self Assessment tax returns remains as follows:

• Day 1 late: Automatic £100 penalty, even if no tax is owed.
• 3 months late: Daily penalties of £10 per day begin, up to a maximum of £900 (running for up to 90 days).
• 6 months late: An additional penalty of the greater of £300 or 5% of the tax owed.
• 12 months late: A further penalty of the greater of £300 or 5% of the tax owed. In cases of deliberate withholding, this can rise to 100% of the tax due.

Note: Some sources have incorrectly circulated figures of £20 per day and a £1,800 cap. These figures are not confirmed under the current HMRC rules for Self Assessment. The correct daily charge remains £10, capped at £900.

2. Late Payment Penalties (From April 2025)

A new staged penalty system applies for late payment of Income Tax Self Assessment (ITSA) and VAT from April 2025:

Period Overdue	Penalty Applied
0-15 days late	No penalty – if full payment or a Time to Pay arrangement is made within this window
16-30 days late	3% of the amount outstanding at day 15
31+ days late	Additional 3% of the amount outstanding at day 30
From day 31 onwards	10% per annum accruing daily on the outstanding balance, in addition to the above

Penalties stop accruing once a Time to Pay (TTP) agreement is agreed with HMRC. However, interest continues to accrue until the balance is cleared.

3. Late Payment Interest Rate (Current as of January 2026)

HMRC charges interest separately from penalties on unpaid tax. The rate is set at the Bank of England base rate plus 4%.

Effective Date	Bank of England Base Rate	HMRC Interest Rate
6 April 2025	5.25%	9.25%
August 2025	5.00%	9.00%
November 2025	4.75%	8.75%
9 January 2026	3.75%	7.75% (current)

The HMRC interest rate changes automatically each time the Bank of England adjusts its base rate. Always check the current rate on GOV.UK before calculating any liability.

The Points-Based Late Submission System

For regular filers (such as those submitting quarterly VAT returns or MTD updates), HMRC uses a points-based system rather than immediate fixed fines.

• Each missed deadline earns one penalty point.
• Once your points reach the threshold for your filing frequency, a £200 fixed penalty is issued.
• Every further late submission while above the threshold earns another £200 fine.

Submission Frequency	Points Threshold Before £200 Fine
Annual	2 points
Quarterly	4 points
Monthly	5 points

Resetting Your Points

Points can be reset to zero, but you must meet all three of the following conditions:

1. Complete a full compliance period (e.g., 12 months of on-time submissions for quarterly filers).
2. Submit all outstanding returns before the reset.
3. Points will expire automatically after a period of good filing behaviour: 12 months for quarterly filers, 6 months for monthly filers, and 24 months for annual filers.

Making Tax Digital (MTD) – Updated Thresholds for 2026-28

MTD for Income Tax Self Assessment (ITSA) is being phased in based on income level. The previously circulated figure of £10,000 and an April 2024 start date were incorrect. The confirmed schedule is:

Start Date	Who Must Comply	Income Threshold
6 April 2026	Self-employed individuals and landlords	Gross income over £50,000 per year
6 April 2027	Self-employed individuals and landlords	Gross income over £30,000 per year
6 April 2028	Self-employed individuals and landlords	Gross income over £20,000 per year

MTD Soft Landing for New Participants (April 2026)

HMRC has confirmed a ‘soft landing’ for taxpayers joining MTD ITSA from April 2026. This means penalty points will not be issued for missing the first four quarterly update deadlines.

Important: The soft landing covers quarterly update submissions only. It does not apply to the annual tax return (the end-of-period statement and final declaration). If you miss the 31 January 2028 deadline for your 2026/27 annual return, a penalty point will still be issued.

How to Avoid HMRC Penalties: Practical Steps

• Know your deadlines: For online Self Assessment, the filing and payment deadline is 31 January each year. For 2025/26, this falls on 31 January 2027.
• Pay as soon as your return is filed: You do not have to wait for a payment reminder. Paying early avoids all late payment penalties and stops interest building.
• Set up a direct debit: If you regularly pay HMRC, a direct debit ensures you never miss a deadline. Allow at least 5 working days for the payment to be processed.
• Use HMRC-approved software: If you are approaching MTD thresholds, start using compatible software (such as QuickBooks, Xero, or FreeAgent) now so you are ready.
• Contact HMRC early if you cannot pay: If you are struggling to pay your tax bill, do not wait. Contacting HMRC before the deadline to arrange a Time to Pay agreement will prevent late payment penalties from accruing.
• Keep records digital and organised: Gather income statements, expense records, and bank statements before the filing period so you are not rushing at the last minute.

Reasonable Excuses and How to Appeal an HMRC Penalty

HMRC accepts appeals against penalties where a taxpayer has a ‘reasonable excuse’ for missing a deadline. Appeals must be submitted within 30 days of the penalty notice date.

What Counts as a Reasonable Excuse?

• Serious illness or hospitalisation that prevented you from filing or paying on time.
• Technical failure of HMRC’s own online portal when you were attempting to file.
• Bereavement of a close family member shortly before the deadline.
• Unexpected natural disasters (flood, fire) that destroyed records or prevented access.
• Postal delays affecting paper submissions (with evidence).

A reasonable excuse must be something that was outside your control. Being too busy, not knowing about a deadline, or relying on someone else who also missed it are generally not accepted.

What Evidence Does HMRC Require?

Reason for Appeal	Evidence Needed
Illness or hospitalisation	Medical letter with specific dates, or hospital discharge summary
Technical failure	Screenshots with visible timestamps and HMRC error messages
Bereavement	Death certificate or funeral correspondence
Fire, flood or theft	Insurance report or official verification letter
Postal delay	Proof of postage date and relevant correspondence

Step-by-Step: How to Submit an Appeal

1. Gather your penalty notice, Unique Taxpayer Reference (UTR), full name and address.
2. Ensure all outstanding returns are filed and, where possible, any tax owed is paid or a Time to Pay plan is in place.
3. Draft your appeal using a factual, professional tone. Use the HMRC appeal form SA370 for postal submissions, or use the HMRC online portal.
4. Clearly state that you are requesting cancellation on the grounds of a ‘reasonable excuse’. Include specific dates and circumstances.
5. Attach all supporting evidence (medical certificates, error screenshots, etc.).
6. Submit within 30 days of the penalty notice date. Keep copies of everything.

What Happens After You Appeal?

• HMRC typically reviews appeals within 30-45 days.
• If successful, the penalty is cancelled and any payment already made is refunded with applicable interest.
• If rejected, you may escalate to the First-tier Tax Tribunal within 30 days of the rejection notice.

HMRC Enforcement: The Bigger Picture

HMRC’s enforcement activity provides context for why staying compliant is more important than ever:

• In 2018/19, HMRC collected £753 million in penalties from taxes and duties (excluding National Insurance). Source: HMRC Annual Report.
• This dropped to approximately £447 million during the Covid pandemic years (2020/21), as HMRC temporarily relaxed enforcement.
• By 2022/23 penalties had rebounded to £762 million.
• In 2023/24, penalty revenues surged by 53% to a record £1,169 million, driven by enforcement around Covid support scheme fraud and offshore non-compliance disclosures.

Early data for April-August 2024 showed a year-on-year decrease of £161 million in penalty revenues, potentially reflecting improved taxpayer compliance or a temporary easing of enforcement.

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