Last year, approximately 1.1 million people missed the self-assessment tax return deadline.
Businesses and landlords who fail to submit their tax returns on time will face significantly higher penalties under new government measures aimed at tackling tax avoidance.
Chancellor Rachel Reeves plans to substantially increase late-payment fines to encourage timely tax payments, with the goal of generating an additional £1 billion annually by the end of the decade.
Last year, approximately 1.1 million people missed the self-assessment tax return deadline.
The policy changes will be unveiled in the Chancellor’s Spring Statement on Wednesday, where she is also expected to introduce major public sector spending cuts and a sharp reduction in the number of civil servants.
Under the new system, taxpayers earning more than £20,000 will face a penalty of 3% of the outstanding amount if their tax payment is delayed by 15 days. If the delay exceeds one month, the penalty will rise to 10%.
Additionally, Ms Reeves will expand the use of third-party debt collectors and recruit more HMRC staff to enhance tax collection efforts.
The crackdown has raised concerns that small businesses will be disproportionately affected by the government’s efforts to recover unpaid taxes.
HMRC has previously faced criticism for aggressively pursuing small businesses for missed deadlines while allowing multinational corporations to negotiate lower tax payments.
The agency has also been accused of providing poor customer service, with reports of taxpayers waiting on hold for extended periods and thousands of calls being disconnected without warning.
The revised penalty system applies to VAT and taxpayers using the Making Tax Digital for Income Tax Self Assessment scheme.
Currently, taxpayers who fail to settle their tax bill by the 15-day deadline face a 2% penalty, which will increase to 3%. If the payment remains outstanding after 30 days, the penalty will rise from 4% to 6%.
Beyond 31 days, additional penalties will be imposed, increasing from 4% per annum to 10% of the unpaid amount.
These changes will take effect from April 2025 for VAT and from 2026 for income tax.
Sole traders and landlords earning more than £50,000 will be brought into the scheme from April 2026. The threshold will then be lowered to £30,000 in the following year, with those earning over £20,000 joining in April 2028.
Approximately four million businesses have incomes below this £20,000 threshold.
The Chancellor will allocate £80 million to third-party debt collection agencies, aiming to recover £1.3 billion over five years—a projected return of £16.25 for every pound invested in UK public services and infrastructure projects.
An additional 600 staff members will be hired for HMRC’s debt management teams, with the expectation that each pound spent on these employees will recover £13 in unpaid taxes.
These new hires will focus on streamlining tax debt collection by incorporating strategies from the private sector and automating administrative processes.
HMRC will also receive £4 million to test a pilot programme in collaboration with the private sector, designed to improve the agency’s approach to recovering long-overdue tax debts. A decision on expanding this initiative will be made later in the year based on the pilot’s results.
Furthermore, Ms Reeves will allocate £100 million to HMRC for recruiting 500 additional compliance officers from April 2025, aiming to recover £141 million in unpaid taxes.
The Chancellor also intends to increase HMRC’s use of third-party data to identify individuals who misrepresent their income or conceal assets, ensuring greater tax compliance.
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