Self-assessment taxpayers who fail to make their second payment on account for the 2022/23 tax year by July 31 will be hit with a 7.5% late payment interest rate, HMRC has warned. This penalty can significantly increase the total amount owed as interest continues to accrue while the liability remains outstanding.
Deadline and Interest Rate Hike
The July 31 deadline marks the first major tax deadline under the new Labour government led by Prime Minister Andy Burnham, with Chancellor John Healey overseeing HM Treasury. HMRC's late payment interest rate has risen sharply from 5.5% at the start of 2023 to the current 7.5%, according to Stefanie Tremain, a partner at a leading accountancy firm.
“HMRC’s late payment interest rate has significantly increased from 5.5% at the start of 2023 to the current rate of 7.5%,” Tremain said. “Late payment may also raise the individual’s ‘profile’ with HMRC and increase the possibility of a HMRC enquiry into their tax returns.”
Impact on Families and Self-Employed
Elsa Littlewood, private client services tax partner at BDO, highlighted the burden on families. “Summer can be an expensive time for families with school holidays and childcare costs weighing on people's budgets,” she said. Littlewood warned that a 7.75% late payment interest rate will apply after July 31 for those who miss the deadline or fail to pay in full.
“Those who miss the deadline or fail to pay the full amount due should be aware that a 7.75 per cent late payment interest rate will be applied to all outstanding amounts owed after July 31,” Littlewood added. “This can significantly increase the amount owed to HMRC as interest will continue to accrue while the liability remains outstanding.”
Consultation on Accelerating Tax Payments
Littlewood also noted that HMRC is consulting on accelerating the timing of tax payments. “This raises a number of issues around whether tax may fall due before cash is received,” she said. “There are also questions around how taxpayers will be able to manage the transition period during which they may be asked to pay for two years' tax in one year.”
Reducing Payments on Account
Taxpayers can reduce their payments on account for the next tax year if they expect a lower liability, but Tremain cautioned against over-reduction. “It’s possible to reduce your payments on account for the next tax year if you think your tax liability will be lower than the year before, however HMRC will charge interest and possibly penalties if you over-reduce and subsequently underpay,” she said.
“Now that the 5th of April has passed, it’s really important that any taxpayer who reduced their 2022/23 payments on account double checks their income for the year, adjusts their payments on account if necessary and pays any shortfall as soon as possible to minimise interest charges. Don’t forget that interest may have been running since 31 January 2023 (when the first payment on account was due) if the payments were over-reduced.”
Who Needs to Make Payments on Account?
Some taxpayers are unaware they need to make payments on account, including those with high personal investment income (bank interest or dividends), income from letting, or self-employment. However, payments on account are not required if the income tax liability for 2021/22 was under £1,000, if more than 80% of tax was paid at source, or if the last return was only for capital gains tax.
Options for Those Struggling to Pay
For taxpayers facing financial difficulties, a Time to Pay arrangement with HMRC may be an option. Littlewood explained: “For qualifying debts of up to £30,000, taxpayers may be able to apply for a Time to Pay arrangement online.”
She also reminded that unpaid tax from the January 31, 2026 deadline for the 2024-25 tax year could attract a 5% penalty if six months late. “HMRC can also charge penalties if the tax return is filed late,” she added.
Making Tax Digital
Littlewood emphasised the importance of Making Tax Digital (MTD) compliance. “Making Tax Digital is now a legal requirement and those taxpayers in scope should check they are signed up, that their software is compatible and their MTD summary is submitted on time,” she said. “This is a busy period for self-employed taxpayers with lots to think about, so those in scope will need to devote some time and effort to making sure they remain compliant.”
Tremain advised proactive communication with HMRC for those struggling: “Taxpayers experiencing financial problems now shouldn’t just ignore their POAs – rather, they should pro-actively contact HMRC, so that they can talk through their position. They may be able to agree a ‘payment plan’ with HMRC, which could enable them to make the relevant tax payments over a longer period.”
