It's a common instinct: a demanding letter from HMRC lands, and the temptation is to put it in a drawer and deal with it later. Unlike some creditors, HMRC doesn't send empty threats — the cost of a tax debt genuinely increases every single day it goes unaddressed, and it keeps increasing whether you open the letter or not.
The current cost of doing nothing
As of 9 January 2026, HMRC's late payment interest rate is 7.75% — set at the Bank of England base rate plus 4%. This interest runs from the very first day a payment is overdue, and it compounds daily until the debt is cleared. On top of interest, separate penalties apply depending on the tax type and how late the payment is.
How VAT penalties escalate specifically
| Timing | What happens |
|---|---|
| Days 1–15 late | Usually no penalty yet, but interest is already accruing |
| Day 16 | First penalty: 3% of the VAT outstanding at day 15 |
| Day 31 | A daily penalty begins accruing at an annual rate of 10% on the outstanding balance, continuing every day until paid |
On a £5,000 VAT debt left unpaid for 45 days, the combined effect of these penalties plus interest can add several hundred pounds to what you owe — money that a prompt response, or an agreed payment plan, would have avoided entirely.
The trap: penalties are avoidable, interest isn't
If you agree a Time to Pay arrangement before a penalty is triggered, late payment penalties won't be applied at all — but interest keeps running on the outstanding amount regardless of any arrangement. This is exactly why acting early, even just to set up a payment plan, is worth far more than waiting until you can pay in full.
What a Time to Pay arrangement actually does
A Time to Pay (TTP) arrangement is an agreement with HMRC to pay a tax debt in instalments. It's specifically designed for exactly this situation — a genuine debt you can't clear immediately, but can manage over time.
- Online self-serve: available for VAT debts up to £50,000, where your returns are up to date and you apply within 21 days of the payment deadline
- Manual negotiation: required for larger debts, other tax types, or if you don't meet the online criteria
Setting one up stops the penalty clock, even though interest continues. It also demonstrates to HMRC that you're engaging with the debt rather than avoiding it — which matters if things escalate further down the line.
What happens if it goes further
Beyond interest and penalties, an unaddressed HMRC debt can eventually lead to enforcement action — including distraint (seizure of goods) or County Court proceedings resulting in a CCJ. HMRC has also been increasing debt management staffing, meaning follow-up on unpaid debts is, if anything, becoming more consistent rather than less.
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View HMRC Letters Help → 💬 Message Us on WhatsAppFor official guidance, see gov.uk: If you cannot pay your tax bill on time. Interest rate figures confirmed against current published HMRC rates as of the "last updated" date above — always check gov.uk for the current rate, as it moves with the Bank of England base rate.