Missing a tax deadline is bad. Missing a tax payment is worse. Alongside the new points-based system for late submissions, Making Tax Digital for Income Tax brings a completely restructured approach to late payment penalties and interest. The old flat 5%/5%/5% schedule is being replaced with a more proportionate regime that scales with how long the tax is overdue — starting at zero for the first two weeks, and ramping up steadily thereafter.

This new regime is designed to be fairer than the old one, which could impose the full 5% penalty on someone who paid a day late. But it is also more complex, with multiple tiers, a daily interest accrual beyond day 31, and a separate interest charge that runs continuously from the original due date. Getting it right — and knowing how to minimise charges if you do fall behind — matters.

This post walks through the new regime in detail, covers the first-year easement that gives taxpayers a gentler introduction, explains how time-to-pay arrangements can help, and sets out the separate rules for interest. The Budget 2025 also announced that rates will increase again from April 2027, so there is a changing landscape to keep track of.

The new proportionate penalty regime

Under the new regime applicable to MTD IT, late payment penalties are staged based on how many days the tax is overdue:

Days Late	Penalty
0–15 days	No penalty
16–30 days	3% of the tax outstanding at day 15
31+ days	3% of tax at day 15 + 3% of tax at day 30 (typically 6% total at day 30)
After day 31	Additional penalty at 10% per annum, calculated daily on the outstanding balance until paid

The structure rewards paying promptly and escalates gradually for continued non-payment. A two-week grace period gives breathing room for minor delays, which the old regime did not.

Under the old regime, the pattern was much blunter: a flat 5% penalty after 30 days, another 5% after 6 months, and another 5% after 12 months. A single penalty decision could potentially add up to 15% of the outstanding tax. The new regime is more proportionate but runs daily once you hit day 31, so it can accrue faster in the short term.

Budget 2025 changes

At Budget 2025, the government announced that the new penalty rates will increase from April 2027:

The first penalty (currently 3%) will rise to 4%.
The daily penalty (currently 10% per annum) will rise to a higher daily rate (exact figure to be confirmed).

So from April 2027, late payment will cost more than it does under the current rates. If you expect to be in MTD IT from April 2026 and anticipate cash flow pressures, this is worth planning for.

The first-year easement

For the first year of the new regime, HMRC is taking a "light-touch approach". The first 3% penalty that would normally apply after 15 days will not be assessed if the taxpayer is doing their best to comply.

In practical terms, this means the first-year easement gives you roughly 30 days' grace before any penalty is assessed, rather than the standard 15. After 30 days, the normal penalty regime kicks in.

This easement applies to taxpayers in the first year of the new regime — which for MTD IT taxpayers is generally 2026/27. The easement is discretionary and depends on HMRC's assessment of whether you are acting in good faith to comply. Don't treat it as a free pass to pay late by 29 days.

Time-to-pay arrangements

If you know you cannot pay in full by the due date, the best course of action is to contact HMRC and agree a time-to-pay (TTP) arrangement. This is a formal instalment plan that spreads the payment over a longer period.

The benefits of a TTP depend on when you agree it:

Before the first penalty date (day 15). Penalties are suspended entirely. As long as you stick to the TTP, no late payment penalties arise.
Between day 16 and day 30. The first penalty is calculated at half rate — 3% of the tax outstanding at day 15, but no additional 3% at day 30, effectively capping the first penalty at half the normal level.
After day 30. The second daily penalty (the 10% per annum daily accrual) stops accruing from the date of the TTP agreement. Penalties already incurred remain in place.

In all cases, interest continues to run during the TTP — a TTP suspends some penalties but does not stop interest.

Breaking a TTP is serious. If you fail to keep up with the agreed instalment plan, any suspended penalties fall back into charge, and you are effectively worse off than if you had never agreed the TTP in the first place. Only agree a TTP if you are confident you can keep to it.

Interest on late-paid tax

Separately from penalties, HMRC charges interest on late-paid tax. This is not a punishment — it is compensation to HMRC for the time value of money that was owed but not paid. Interest and penalties are distinct charges.

The interest rate is set by reference to the Bank of England base rate:

Current rate: base rate + 4% (increased from base rate + 2.5% on 6 April 2025).

Interest is calculated as simple interest (not compound), running daily from the original due date until the date of payment. It is a continuous accrual — unlike penalties, there is no grace period and no waiting for a threshold.

Importantly, interest is not subject to the reasonable excuse defence. You cannot appeal against interest on the grounds that you had a good reason for paying late. Interest continues to run regardless.

Interest is also charged on late-paid penalties — so if a penalty notice is not paid within 30 days, interest starts running on the penalty itself.

One more technical point: interest on late-paid tax is not an allowable deduction for business profits. You cannot treat it as a business expense.

The old regime (still applicable in some cases)

The new regime described above applies to taxpayers in MTD IT, and will extend to all ITSA taxpayers from 2026/27 following Budget 2025. For earlier years and non-MTD taxpayers who are still on the old regime, the old rules still apply:

Delay	Penalty
After 30 days	5% of tax outstanding
After 6 months	Additional 5% of tax still outstanding
After 12 months	Additional 5% of tax still outstanding

These are cumulative. A £1,000 liability unpaid for over 12 months would attract three tranches of 5% — £150 in penalties. The old regime is blunter but more forgiving at the start (no penalty at all for 30 days).

For the 2024/25 tax year and earlier, transitional rates apply: 2% (not 3%) at day 15, and 4% per annum (not 10%) after day 31.

How HMRC allocates payments

When you pay HMRC, the money is allocated in a default order: outstanding tax first, then outstanding penalties, then outstanding interest. This is automated.

You have the right to request a different allocation at the time of payment. This can reduce penalties in certain situations — for example, where one liability has penalty implications and another does not. You must exercise this right at the time of payment or before HMRC communicates its allocation.

If HMRC's default allocation is unfavourable, you can make a "referral request" to someone with authority to override the system. Allow up to 3 weeks for reallocation and set a reminder to follow up. Once you have exercised your right of allocation, both parties are bound by the result.

Avoiding late payment penalties

Practical steps to avoid late payment charges:

Know your deadlines. Balancing payments under Self Assessment are due by 31 January after the end of the tax year. Payments on account are due by 31 January and 31 July. Under MTD, the final declaration deadline of 31 January doubles as the tax payment deadline for the balancing charge.
Budget through the year. Set aside a percentage of each quarter's profits for tax — many landlords and sole traders find 25-30% a reasonable rough guide, though your actual rate depends on your income and allowances.
Use HMRC's Budget Payment Plan. You can pay regular instalments towards your tax liability throughout the year, reducing the lump sum due on 31 January.
Set up Direct Debit for scheduled payments. This avoids accidentally missing a payment on account.
Act fast if you will miss a deadline. Contacting HMRC before day 15 to agree a TTP prevents any penalty arising. Even calling after the deadline is better than doing nothing — a TTP agreed later still limits the total penalty.

What happens if you appeal

You can appeal late payment penalties on the grounds of reasonable excuse. The process is:

Request an HMRC internal review within 30 days of the penalty notice.
If unsatisfied with the review outcome, appeal to the First-tier Tax Tribunal.

Reasonable excuse grounds for late payment include serious illness, bereavement, IT failures, and other circumstances beyond your control. Insufficient funds is not usually a reasonable excuse unless caused by unforeseeable external events.

Interest cannot be appealed on reasonable excuse grounds. Even if your penalty is cancelled on appeal, interest continues to accrue.

Frequently Asked Questions

Q: What happens if I pay my tax bill just two days late? A: Under the new regime, no penalty applies for 0-15 days late. So a two-day delay triggers no penalty — but interest does start to accrue from the original due date. Pay as soon as possible to minimise the interest charge.

Q: Do the quarterly updates come with payment obligations? A: No. Quarterly updates are submissions of data only, not payments. Tax under MTD IT is still paid once (or in instalments through payments on account) — the balancing payment is due 31 January after the end of the tax year, same as under the old Self Assessment system.

Q: What if I agree a TTP and then can't keep to it? A: Breaking a TTP brings any suspended penalties back into charge, and the TTP agreement is terminated. You would then be in the same position as if the TTP had never been agreed, plus the time you have used. If you foresee trouble with a TTP, contact HMRC early to renegotiate rather than simply missing a payment.

Q: Can I get interest waived if I have a good reason for being late? A: No. Interest is not subject to the reasonable excuse defence. It accrues automatically from the original due date regardless of circumstances. The only way to stop interest is to pay.

Q: Are penalties deductible for tax purposes? A: No. Tax-related penalties are not allowable deductions for income tax or corporation tax. Interest on late-paid tax is also not deductible for business profits.

Conclusion

Late payment penalties under the new regime are more proportionate than the old flat 5% system, but they can still add up quickly once you pass day 30. The key is to act fast. If you can pay within 15 days of the due date, you face no penalty at all. If you cannot pay in full, contact HMRC before day 15 and agree a time-to-pay arrangement — that prevents penalties arising altogether, even though interest continues to run. And build a buffer into your cash flow planning so that tax payments don't catch you out. Late payment is expensive, and the new regime, for all its fairness, still bites hard if you ignore it.

Late Payment Penalties and Interest Under MTD: A Complete Guide