Avoid a 5% tax penalty without having to contact HMRC

2 March 2025 is unlikely to be a date circled in many people’s calendars but for those who have not yet paid their tax bill for the 2023/24 tax year, it could prove to be a costly date to forget. If tax due on 31 January 2025 remains unpaid for more than 30 days then HMRC will charge a 5% penalty, based on the tax unpaid.

This can raise significant sums for HMRC who has confirmed that in previous years, hundreds of thousands of taxpayers have been subject to this 5% late payment penalty which has previously generated more than £30m a year for the Exchequer.

However, this may be avoided if taxpayers take advantage of Time to Pay arrangements made available by HMRC. In updated guidance published on 17 February 2025, HMRC confirmed that many self-assessment taxpayers will be able to set up a payment plan, known as a ‘Time to Pay arrangement’, for outstanding 31 January 2025 liabilities via an online application.

Provided it is completed within 60 days of the 31 January 2025 due date, an online Time to Pay arrangement can be set up without having to contact HMRC. This is available to those self-assessment taxpayers who owe £30,000 or less in tax, are up to date with their tax returns and do not have any other payment plans or outstanding debts with HMRC.

If a taxpayer enters into a Time to Pay arrangement by 2 March 2025 in respect of their 31 January 2025 tax bill, they may avoid a late payment penalty on this outstanding tax liability.

In its guidance, HMRC indicates that it considers Time to Pay arrangements to be flexible, rather than a fixed, formal contract, adapting to changes in the individuals’ circumstances. Whilst the arrangement allows payment of the liabilities to be spread out, taxpayers should note that statutory interest will be incorporated into the payment plan on the amount of tax outstanding. The interest rate for late payment is set to increase to 4% above the Bank of England (BoE) base rate from the start of the new tax year. Based on the current BoE base rate, taxpayers could see a rate of 8.5% applied to outstanding tax due from 6 April 2025.

The updated online facility is a welcome further development in simplifying the process for taxpayers who need a payment plan to pay their tax liabilities without the need to spend additional time trying to get through to HMRC on the phone to discuss the matter. It should also hopefully help to ease some of the administrative burden on HMRC in dealing with calls.