Penalties and interest: key measures included in Budget 2021.

Late submission penalties 

A points-based late filing penalty regime will replace existing late filing penalties for VAT and Income Tax. 

This measure was consulted on in 2018, see Penalties: Making Tax Digital. 

  • When a taxpayer misses a submission deadline, they will incur a point. 
    • Points accrue separately for VAT and Income Tax. 
  • A penalty of £200 is charged when the taxpayer reaches a points threshold. 
  • The points threshold is based on the taxpayer's submission frequency. 
  • Accrued points expire after 24 months where the taxpayer remains below the points threshold. 
  • When a points threshold is reached, all points will expire after the taxpayer has met their return obligations for a set period based on their submission frequency.
  • Where a taxpayer continues to miss submission deadlines after reaching the points threshold (and a penalty has been charged) they will be liable for a further fixed penalty for each missed obligation. 

Late payment penalties

An amended Late payment penalty regime will be aligned across the main taxes. 

  • A first late payment penalty will be payable 30 days after the payment due date based on a percentage of the balance outstanding. 
    • No penalty will be payable if the tax is paid within 15 days of the due date. 
    • Tax unpaid after day 15 will attract a 2% penalty. 
    • Where tax is unpaid by day 30, the penalty increases to 4%.
  • From day 31, a second late payment penalty is charged ar 4% per annum, accruing on a daily basis based on amounts outstanding. 
  • Penalties will stop accruing where a Time To Pay agreement is reached. 


The new late payment and late submission penalty rules will apply as follows:

  • VAT: accounting periods beginning on or after 1 April 2022.
  • Income Tax (where business or property income is over £10,000): accounting periods beginning on or after 6 April 2023.
  • All other Income Tax taxpayers: accounting periods beginning on or after 6 April 2024. 

Interest harmonisation 

New legislation will align the interest rules for VAT with those for Income Tax from April 2022. 

  • Where VAT is paid after the due date, late payment interest will be payable from the date that payment became due until the date it is received by HMRC.
  • HMRC will pay repayment interest on overpaid tax and refunds due to be repaid. 

Useful guides on this topic

Budget 2021: Subscriber guide
A detailed guide with links to more detail on all the key topics for SMEs and their owners.

Penalties: Late Filing
Late returns can be subject to a mix of fixed and tax geared penalties. What penalties apply for late filing? Which penalty will apply and when? 

Penalties: Late Payment (Subscriber guide)
What penalties are charged when tax is paid late? A guide for Subscribers.

Grounds for Appeal: Reasonable excuse
What is considered to be a 'reasonable excuse' when a taxpayer makes an appeal against a tax compliance failure?

Budget 2021: At a glance
A summary key budget announcements together with items published without announcement.

Squirrel ad

Are you enjoying our content? 

Thousands of accountants and advisers and their clients use as their primary TAX resource.

Register with us now to receive our receive our FREE SME Topical Tax Update & newletter