HMRC collected millions in late payment interest during the 2023/24 tax year, as taxpayers missed deadlines and faced higher charges due to rising interest rates. New figures show the scale of the issue, with concerns growing that further changes to the tax system could push these costs even higher in the coming years.
Rising interest rates increase penalties
HMRC charged late payment interest to around 1.3 million taxpayers in 2023/24, generating £137m in revenue. The average charge was just over £100, though the total can rise quickly depending on how long payments remain outstanding.
The cost of missing deadlines has increased significantly. From 6 April 2025, HMRC raised its late payment interest rate to 4% above the Bank of England base rate, up from 2.5%. This pushed rates as high as 8.25% for extended periods.
Interest is applied daily on the outstanding balance, meaning even relatively small tax bills can grow quickly if left unpaid. For taxpayers already struggling with cashflow, this can create a compounding problem.
The £137m figure may also understate the true scale. HMRC only records late payment interest once it has been settled, meaning totals for 2023/24 are likely to rise further. Previous years indicate an upward trend, with £200.1m collected in 2022/23 and £194.1m in 2021/22.
Complexity and shrinking allowances
Experts suggest that increasing complexity in the UK tax system is a key factor behind missed payments.
Over recent years, tax-free allowances have been reduced, bringing more individuals into the tax net. The dividend allowance, for example, has fallen sharply from £5,000 to just £500. At the same time, dividend tax rates increased in 2022 and are set to rise again for some taxpayers.
Capital gains tax (CGT) has followed a similar path, with lower allowances and higher effective liabilities for many investors. As a result, individuals who may not previously have needed to report or pay tax are now required to do so, often for the first time.
This shift has created a growing group of taxpayers who are less familiar with filing requirements, deadlines and payment processes. Mistakes, delays and missed payments become more likely in this environment, increasing exposure to interest charges and penalties.
Making Tax Digital adds new pressures
Looking ahead, there are concerns that the introduction of Making Tax Digital (MTD) for Income Tax could add further pressure. From April 2026, landlords, sole traders and self-employed individuals with qualifying income above £50,000 will be required to follow new digital reporting rules.
Awareness of these changes remains relatively low, with estimates suggesting that around a third of affected taxpayers have a limited understanding of what is required. This raises the risk of non-compliance, particularly in the early stages of implementation.
MTD will introduce more frequent reporting, including quarterly updates, and a new penalty points system for late submissions. While the Government expects the changes to improve accuracy and reduce the tax gap, some remain sceptical about how smoothly the transition will be.
For many small business owners and landlords, the shift will mean additional administrative work and a greater need for digital tools and support. Those who fail to adapt quickly could face higher costs due to penalties and interest.
The Government has projected that MTD could generate an additional £780m in tax revenue by 2028/29. However, questions remain about whether this will come from improved compliance or from higher charges linked to errors and late payments.
As the tax system evolves, the combination of higher interest rates, reduced allowances and new reporting requirements is likely to keep pressure on taxpayers. Without greater awareness and support, late payment charges may continue to rise.
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