If VAT is paid in full within 15 days of the due date there is no penalty, only late payment interest. After day 15 a first penalty of 3% of the amount then unpaid is charged, with a further 3% of anything still unpaid at day 30, and from day 31 a second penalty runs daily at 10% a year until the tax is paid. Late payment interest at the Bank of England base rate plus 4% runs from the first day the payment is overdue.

Which VAT payments can attract these penalties?

The rules apply to VAT accounting periods starting on or after 1 January 2023, when they replaced the default surcharge. HMRC’s guidance says late payment penalties can apply to VAT due on a return, VAT due following an amendment or correction, and VAT due under an assessment, whether HMRC raised it because you did not file or for another reason. Two kinds of payment are excluded from penalties: VAT payments on account and instalments under the Annual Accounting Scheme. Late payment interest still applies to a missed payment on account.

The penalties are set by Schedule 26 to the Finance Act 2021. The same schedule now applies to Making Tax Digital for Income Tax, covered separately in late payment penalties under MTD for Income Tax.

How is the first late payment penalty worked out?

Paragraph 10 of Schedule 26 defines the 15 day period as 15 days beginning with the day after the due date, and the 30 day period in the same way. Paragraph 5 then works in two stages:

  • Amount A is 3% of the tax that is still unpaid at the end of the 15 day period.
  • Amount B is 3% of the tax that is still unpaid at the end of the 30 day period.

If you pay in full between day 16 and day 30, the first penalty is amount A only. If tax is still unpaid at the end of day 30, the first penalty is amount A plus amount B. Because each stage looks only at what is unpaid at that point, a part payment before day 15 or day 30 reduces the penalty.

These rates took effect from 1 April 2025. Before then the two stages were each 2% and the daily rate was 4% a year, so a penalty for an earlier period may have been calculated on the old figures.

How does the second late payment penalty work?

Under paragraph 8, if any tax is still unpaid at the end of the 30 day period, a second penalty is charged at 10% a year on the balance outstanding from time to time. It runs from day 31 until the tax is paid in full. HMRC’s guidance explains that it assesses the second penalty once the balance is paid or, if tax remains outstanding, just before the end of the two year assessment time limit.

Can a Time to Pay arrangement stop the penalties?

Yes, and timing decides how much it saves. Under paragraphs 4 to 6 of Schedule 26:

  • if you make proposals before the end of the 15 day period that lead to a Time to Pay agreement, no first penalty is payable;
  • if you make them between day 16 and day 30, the first penalty is limited to amount A;
  • if an agreement is in place after day 30, the second penalty stops running from the day you made the proposals.

The agreement does not need to be signed off within the window; what counts is when your proposals were made. If you then break the agreement, HMRC can charge both penalties as if it never existed. Interest continues to run on the outstanding balance throughout an instalment arrangement.

How is late payment interest charged?

Late payment interest runs from the first day a payment is overdue until the day it is paid in full. HMRC sets the rate at the Bank of England base rate plus 4% from 6 April 2025 (previously plus 2.5%). HMRC’s published table shows a late payment rate of 7.75% from 9 January 2026. Interest is simple, not compounded, and it is also charged on late payment and late submission penalties that are not paid on time.

You cannot appeal late payment interest, but HMRC says you can object if HMRC made a mistake or caused an unreasonable delay, if you dispute the relevant date, or if you are questioning the law. An objection can be accepted only once the tax has been paid in full. For how interest works across taxes, see HMRC late payment interest.

How much could a late payment cost?

HMRC’s own example uses a company owing £15,000 that pays 51 days late:

Charge Calculation Amount
First penalty, day 15 stage 3% of £15,000 £450.00
First penalty, day 30 stage 3% of £15,000 £450.00
Second penalty, days 31 to 51 £15,000 x 10% x 21 / 365 £86.30
Total penalties £986.30

Illustration only. Interest comes on top. At 7.75% for 51 days, interest on £15,000 would be about £162. Had the company paid in full on day 14 it would have paid around £45 of interest and no penalty; had it proposed a Time to Pay arrangement by day 15 and kept to it, it would have paid interest only.

Can you appeal a late payment penalty?

HMRC issues a penalty decision letter offering a review. You can ask for the review in your VAT online account, or appeal to the tax tribunal, and the penalty may be cancelled or amended if you had a reasonable excuse. Before appealing, check the dates HMRC used: the penalty depends on when cleared funds reached HMRC, so the method of payment is often the deciding point. The HMRC penalties table compares these penalties with others.

What mistakes make penalties bigger?

  • Waiting until the money is available rather than contacting HMRC before day 15. Proposals made early can avoid the first penalty entirely.
  • Assuming the penalty is fixed once triggered. Paying part of the balance before day 30 cuts amount B, and every day paid early cuts the second penalty.
  • Missing a Time to Pay instalment, which can revive the penalties in full.
  • Paying by a slow method on the deadline day. See VAT return and payment deadlines for how long each method takes.
  • Confusing these penalties with late filing. A late return earns penalty points under a separate system, even if the VAT itself is paid on time.

If HMRC opens a check into your return, tax investigation insurance pays your accountant’s fees. Solar Protect cover pays up to £100,000 with no excess; it never pays tax, interest or penalties. Read how our cover works or get a quote.

Related Accountapedia entries

Sources

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 19 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.