The Finance Act 2021 (Increase in Schedule 26 Penalty Percentages) Regulations 2025

Published: Thu 15th May 25

These regulations, effective May 31, 2025, amend Schedule 26 of the Finance Act 2021 to increase penalties for late tax payments.

The first penalty for late payment (after 15 days) rises from 2% to 3%, while the second penalty (after 30 days) increases from 4% to 10%.

The changes apply to most tax payments due on or after May 31, 2025, with exceptions for specific tax years and VAT payments relating to earlier periods.

Arguments For

Increased Revenue Collection: Higher penalties incentivize timely tax payments, leading to improved revenue collection for the government. This strengthens the government's fiscal position and enables funding for public services.
Fairness and Equity: Increased penalties ensure those who consistently delay tax payments bear a proportionally greater financial burden, promoting fairness among taxpayers. This approach contributes to a more equitable tax system.
Deterrence of Tax Evasion: Stronger penalties act as a deterrent against deliberate or negligent tax evasion, reducing instances of non-compliance and protecting public revenue.
Statutory Basis: The amendments are based on the powers granted under Schedule 26 of the Finance Act 2021, providing a clear legal framework for the increased penalties.

Arguments Against

Burden on Taxpayers: Higher penalties could disproportionately affect individuals and businesses facing financial difficulties, potentially worsening their situations and hindering economic recovery.
Administrative Costs: Implementing and managing the increased penalty regime may incur additional administrative costs for HMRC, potentially offsetting any revenue gains.
Complexity and Confusion: Changes to tax penalties can create confusion among taxpayers, leading to errors and increased demand for support services from HMRC.
Impact on Investment and Economic Growth: The higher penalties might discourage investment and hinder economic growth by increasing uncertainty and compliance burdens for businesses.

Citation, commencement and effect 1.

(1)

These Regulations may be cited as the Finance Act 2021 (Increase in Schedule 26 Penalty Percentages) Regulations 2025.

(2)

These Regulations come into force on 31st May 2025.

(3)

These Regulations have effect in relation to a failure to pay the tax due where the specified date² is on or after 31st May 2025, unless—

(a)

the tax due is income tax or capital gains tax that is payable in respect of the tax year 2024-25³ or an earlier tax year, or

(b)

the tax due is value added tax that—

(i)

is payable by reference to a prescribed accounting period that began before 1st April 2025, or

(ii)

has been assessed under sections 80(4A) or 80B of the Value Added Tax Act 1994 (recovery of excess credit)⁴ in relation to value added tax payable by reference to a prescribed accounting period that began before 1st April 2025.

(4)

In this regulation “prescribed accounting period” has the same meaning as in the Value Added Tax Act 1994⁵.

Section 1 establishes the regulations' title, effective date (May 31, 2025), and scope.

The increased penalties apply to tax payment failures on or after this date.

Exceptions exist for income tax, capital gains tax due for tax year 2024-25 or earlier, and VAT related to accounting periods starting before April 1, 2025, or assessed under specific sections of the Value Added Tax Act 1994 for recovery of excess credit.

The definition of "prescribed accounting period" remains consistent with the Value Added Tax Act 1994.