HMRC interest and penalties for late VAT payments

Photo: Canva

HM Revenue & Customs (HMRC) charges late payment interest at 7.75 per cent a year from the first day a VAT payment is overdue. Late payment penalties start only when payment is more than 15 days late, with charges rising again from day 31.

The rules apply to VAT accounting periods beginning on or after 1 January 2023. Earlier periods fall under the VAT default surcharge regime.

When payment is late	Charge	How HMRC works it out
Day 1	Late payment interest	7.75 per cent a year, charged daily until payment in full
Days 1 to 15	No late payment penalty	Interest still builds from the first overdue day
Days 16 to 30	First late payment penalty	3 per cent of VAT unpaid at day 15
Day 31 and later	First late payment penalty	3 per cent of VAT unpaid at day 15, plus 3 per cent of VAT unpaid at day 30
Day 31 and later	Second late payment penalty	10 per cent a year of the unpaid balance, charged daily

When late VAT charges begin

A VAT Return and its payment usually share the same deadline. For a standard accounting period, the deadline falls one calendar month and seven days after its end, and HMRC must receive payment by then.

A weekend or bank holiday does not extend that deadline. The VAT online account shows the dates for each return and when money must clear HMRC’s account.

Late payment interest and penalties are separate charges. Interest begins on the day after the due date, while a first late payment penalty does not arise before day 16.

HMRC counts interest from the day after the deadline through to and including the payment date. A payment due on 7 May and made on 14 May is seven days overdue for interest purposes.

The 7.75 per cent interest rate took effect on 9 January 2026. For VAT, HMRC sets the rate four percentage points above the base rate, and links it in law to the Bank of England’s Bank Rate.

The Bank of England kept Bank Rate at 3.75 per cent at its meeting ending 16 September 2026. Its next decision is due on 5 November 2026.

Interest also applies when a VAT payment on account is missed. Overdue late payment penalties themselves can also attract interest.

How the penalty stages work

If the whole VAT bill is paid between days 16 and 30, the first late payment penalty is 3 per cent of the amount still outstanding on day 15. There is no second late payment penalty in this period.

Payment on day 31 or later produces a larger first penalty. HMRC takes 3 per cent of the amount unpaid at day 15 and adds 3 per cent of the amount unpaid at day 30.

From day 31, a second late payment penalty builds each day at an annual rate of 10 per cent on the remaining balance. It runs until the amount is paid in full.

VAT payments on account are outside the late payment penalty rules. Interest can still arise when a VAT payment on account is missed.

HMRC may assess the second penalty shortly before the two-year assessment time limit ends if tax remains unpaid. Separate rules set the time limits for HMRC to assess unpaid VAT.

A worked example of the charges

Consider an example where £10,000 is overdue for 40 days.

Interest is £10,000 × 7.75 per cent × 40 ÷ 365. That produces interest of £84.93.

The first late payment penalty is £10,000 × 3 per cent at day 15, plus £10,000 × 3 per cent at day 30. The first penalty is £600.

The second penalty runs for 10 days, from day 31 through day 40. It is £10,000 × 10 per cent × 10 ÷ 365, which equals £27.40.

The total extra cost in this example is £84.93 interest, £600 first penalty and £27.40 second penalty. That is £712.33 in total, alongside the £10,000 VAT bill.

For examples of working out VAT on a sale price, see how VAT is calculated.

How to reduce or prevent the charges

Paying in full by day 15 prevents the late payment penalties that begin on day 16. Interest still applies from the first overdue day until payment clears.

Where full payment is not possible, HMRC says a business can ask for a Time to Pay arrangement.

HMRC may agree lower penalties or no penalties under an arrangement, but this is not guaranteed. The arrangement can cover the VAT, interest and penalties.

Interest continues on any unpaid balance during a Time to Pay arrangement. HMRC checks whether the payment plan is affordable and asks for full payment if it cannot agree a plan.

If a business breaks the terms of an arrangement, HMRC may cancel it. It may then charge both penalties as if the arrangement had never been in place.

The Payment Support Service is the route HMRC gives for businesses that cannot pay in full before the deadline.

A Direct Debit must be set up at least 3 working days before sending the VAT Return for the first payment to be collected. After the Direct Debit is in place and the return has been sent, HMRC takes the payment three working days after the payment deadline.

A Direct Debit cannot pay a VAT penalty or surcharge.

Late returns are a separate problem

The penalty point threshold is 2 points for annual returns, 4 for quarterly returns and 5 for monthly returns. Reaching the threshold brings a £200 penalty.

Each later late return while the business remains at the threshold brings another £200 charge. The payment rules still apply separately where VAT is owed.

A business may seek an HMRC review of a late payment penalty or take the matter to the tax tribunal. HMRC may cancel or amend a penalty where there is a reasonable excuse.

There is no appeal against late payment interest, though an objection route exists in limited circumstances.

Common questions

Does interest stop when a Time to Pay arrangement starts?

No. Interest continues on the balance still unpaid under the arrangement until payment in full.

Can HMRC charge both interest and penalties?

Yes. Late payment interest is separate from the first and second late payment penalties, so more than one charge can apply to the same overdue VAT bill.

What happens if VAT is paid 20 days late?

Interest runs from day one. HMRC charges a first late payment penalty of 3 per cent of the balance outstanding on day 15, while the second penalty starts only from day 31.

Can a business appeal a late payment penalty?

Yes. A business can request that HMRC reviews the penalty or bring an appeal before the tax tribunal. A reasonable excuse can mean HMRC cancels the penalty or changes the amount.

Sources

• GOV.UK: How late payment penalties work if you pay VAT late
• GOV.UK: Late payment interest if you do not pay VAT or penalties on time
• GOV.UK: HMRC interest rates for late and early payments
• Bank of England: Bank rate maintained at 3.75% - September 2026 Monetary Policy Summary and Minutes
• GOV.UK: If you cannot pay your tax bill on time: Overview
• GOV.UK: Sending a VAT Return: When to do a VAT Return
• GOV.UK: Pay your VAT bill: Pay by Direct Debit
• GOV.UK: Penalty points and penalties if you submit your VAT Return late