From 1 April 2025, HMRC tightened the late-payment penalties regime. For VAT, the first surcharge now bites at 15 days, with a second at 30 days, and a daily penalty from day 31 that annualises at 10%. Alongside this, HMRC’s late payment interest is set by law at the Bank of England base rate plus 4% from 6 April 2025 – as at 6 October 2025 the rate is 8.00% – so the cost of missing deadlines adds up fast (HMRC, 2025). For employers, PAYE and National Insurance still attract separate late-payment penalties and interest, but the higher interest rate means delays are more expensive than a year ago.
Why does this matter? Because these charges erode cashflow, eat into margins and can trigger knock-on issues like missed supplier terms and strained banking covenants. Government research also shows smaller firms are more exposed to late payments in the wider economy: 32% of micro businesses reported paying suppliers late because their own customers paid late – a reminder that payment discipline upstream affects everyone downstream (DBT, 2024). In short, keeping tax payments on time is now a core cash discipline, not just a compliance tick.
In this blog, we map the VAT penalty timeline, explain how the interest interacts with penalties, clarify the position for PAYE, and set out practical credit-control actions to keep your cash moving. If you need help putting this into practice, our Business tax and Payroll teams can take this off your desk.
The VAT penalty timeline from 1 April 2025
The VAT rules now follow a clear ladder. Pay within 15 days of the due date, and there’s no penalty. After that, charges escalate:
- Day 15 penalty: 3% of the amount still unpaid at day 15 (HMRC, 2025).
- Day 30 penalty: A further 3% of the amount still unpaid at day 30 (HMRC, 2025).
- From day 31: Daily penalty at an annualised 10% on the outstanding amount until paid in full.
Two safety valves help if you act quickly:
- Time to Pay: If you propose and agree a Time to Pay arrangement within the 15 or 30-day windows, HMRC can suspend the relevant penalty while you keep to the plan.
- Prompt payment: The daily penalty stops the day HMRC receives cleared funds.
Remember that penalties are separate from interest. Even if you avoid a penalty by paying on day 14, late payment interest accrues from the day after the due date until payment clears – see the interest section below (HMRC, 2025).
PAYE: What changes and what stays the same
PAYE and National Insurance continue to use their established penalty framework for late payments. In-year penalties are percentage-based and depend on how many times you pay late across the tax year, with additional charges for very late payments, plus daily interest on unpaid amounts. With HMRC’s late payment interest now tracking base rate plus 4%, the cash cost of slipping a PAYE deadline is materially higher than it was before April 2025 (HMRC, 2025).
The takeaway: payroll needs a tight timetable, accurate data and sign-off routines. If you’re struggling, we can implement controls or run it for you through our payroll service.
How interest works – and why it stings
From 6 April 2025, HMRC sets late payment interest at base rate + 4%. As at 6 October 2025, that equates to 8.00% on most overdue taxes until paid. Interest is simple, not compounded, but it applies daily and runs alongside penalties. That means:
- VAT example: Miss the due date, and interest starts on day 1. Cross day 15 and 30, and the 3% penalties apply. From day 31, the 10% per annum daily penalty kicks in as well as interest until you clear the balance.
- PAYE example: Interest runs from the due date until cleared, and late-payment penalties apply based on the number of late payments in the year.
With margins still tight, the combination of penalties and interest can turn a small admin delay into a persistent cash drag.
Late-payment penalties: Practical actions to protect cash
The best defence is a payment system that leaves little to chance. Focus on predictable processes, clear responsibilities and early warnings.
- Calendar discipline: Build a single payment calendar covering VAT, PAYE and other taxes, and share it with finance and owners. Add HMRC buffer dates for bank holidays.
- Working capital rhythm:
- Invoice promptly: Issue invoices on delivery or project milestones.
- Chase early: Start reminder sequences before the due date, not after.
- Segment debtors: Prioritise high-value customers and long-outstanding balances.
- Credit control scripts:
- First reminder: Polite nudge before due date.
- Second reminder: Firm request with a promised call-back time.
- Final step: Senior-to-senior call agreeing a payment date or instalments.
- Payment methods: Offer bank transfer details on every invoice and consider card or open banking links to remove friction.
- Authorisation workflow:
- Two-step sign-off: Finance prepares, a director approves.
- Cut-off times: Set internal cut-offs one business day before HMRC deadlines to allow for banking delays.
- Contingency lines:
- Overdrafts: Keep headroom to avoid missing dates due to timing differences.
- Time to Pay: Contact HMRC before penalties crystallise if cash is tight – agreed plans can mitigate penalties.
- Systems hygiene:
- Bank rules: Automate remittance matching to speed up reconciliation.
- Dashboard: Daily cash position with VAT and PAYE accruals visible at a glance.
- Review cycle: Weekly receivables review, monthly debtor days trend.
Late-payment penalties in everyday numbers
To make the scale real, here’s a plain-English illustration for VAT under the 2025/26 rules:
- £20,000 VAT due, paid on day 20: First penalty: £600 (3% of the amount unpaid at day 15). Interest also applies for the days overdue.
- Same bill, paid on day 35: First penalty: £600 at day 15, second penalty: £600 at day 30, plus five days of the daily penalty at a rate equivalent to 10% per annum on the then-unpaid amount, plus late payment interest.
Small differences in timing lead to meaningful costs – and those costs repeat every quarter if processes aren’t fixed.
Late payment pressure in the wider economy
Payment behaviour across supply chains still squeezes small firms. Government research found 32% of micro businesses reported paying suppliers late because their own customers paid late – a sign of how fragile cash positions can be when receipts slip (DBT, 2024). That is exactly why HMRC’s late-payment penalties and interest feel harsher this year: they bite at the same time customers are slower to pay. Building stronger receivables routines is the most reliable way to avoid unpleasant tax costs.
Late-payment penalties: What to do next
If you’ve slipped a deadline recently, act now to stop costs compounding. Clear the balance as quickly as possible and consider a Time to Pay request where appropriate. Then run a short post-mortem: was this a banking delay, an approvals bottleneck, or missing diary prompts? Quick fixes, like earlier cut-offs or clearer responsibilities, prevent repeat penalties.
If you’re looking ahead to the next quarter, we can help you put simple but effective controls in place – from VAT calendar checklists to debtor-chasing scripts – and, where useful, take tasks off your plate. Our ethos is practical and people-first: we listen, tidy the process, and keep you compliant without fuss. Talk to us and we’ll get you set up.
Need help avoiding late-payment penalties and protecting cash? Get in touch – we’ll put in place a plan that works for your business.