Late interest penalties hit 1.4m taxpayers

Late interest penalties hit 1.4m taxpayers

May 23, 2023

More than 1.4 million taxpayers had to pay interest for late payments in the 2020-21 tax year after missing filing deadlines

There was a 15% increase in the number of people charged interest on overdue tax payments in 2020-21, compared to the pre-pandemic figure of 1.2m, showed a freedom of information (FOI) request by investment platform AJ Bell.

The FOI did not reveal how much money HMRC was raised from taxpayers who failed to pay their tax bills on time.

The increase came despite furlough and corporate dividend cuts meaning many would have owed HMRC less than normal for that year.

Around 270,000 people were hit with a penalty for missing the self-assessment tax return deadline in 2020-21, down from 290,000 the year before. A further 110,000 had to pay a late filing penalty as well as interest charges.

In total, the tax authority raked in around £27m in overdue self-assessment tax payments, which sees an initial £100 penalty for those who fail to process their returns on time.

By the 2024-25 tax year, the number of people HMRC estimate to be paying dividend and capital gains tax (CGT) will increase by 2m, according to AJ Bell.

It indicates that hundreds of thousands more taxpayers could find themselves facing penalties for late tax payments if a similar proportion misses the deadlines.

The scale of these penalties as a result of missing the tax return deadline highlighted the large number of taxpayers struggling with the UK’s complex tax system, with the issue set to be exacerbated by frozen tax thresholds and cuts of dividend and CGT allowances.

Those who fail to process their self-assessment tax returns by the deadline of 31 January each year face an initial £100 penalty from HMRC. If the return is filed more than three months late, a daily £10 penalty is charged.

However, the current standard £100 fine is due to be changed to a points-based system in 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.

Laura Suter, head of personal finance at AJ Bell, said: ‘These figures lay bare just how hard the British public find completing their tax return and paying their tax bill.

‘As the government drags more people into paying tax via self-assessment, we’ll see more and more taxpayers hit by these penalties. With the tax-free allowance on capital gains and dividend taxes being dramatically cut in the next year, more people will have to file a tax return for the first time.

‘On top of that, those who earn more than £100,000 must file a return, as well as those who have hit the child benefit high income charge and people who have other sources of income from their main job. Some people are going to struggle to complete the return, or not even realise they have to file one in the first place.’

Suter recommends that one way to avoid late filing is to set regular calendar reminders to prompt you to file on time.

‘Another alternative is to outsource it to a professional. It’s very possible to file a return yourself, especially if it’s just to report an investment gain, for example, but you might decide that delegating it to an accountant or tax specialist is worth the cost.’