VAT in 2025/26: Higher Penalties, Sharper Interest and Why You Need to Pay On Time
From April 2025, HMRC is turning up the heat on late VAT payments — and the consequences for falling behind will become much more expensive.
While VAT thresholds remain frozen, the cost of non-compliance is rising, with tougher late payment penalties and a higher interest rate on overdue VAT bills.
At Merranti, we want to make sure you’re not caught out. Here’s what’s changing — and what you can do to protect your business.
VAT Thresholds: Still Frozen, Still Pulling More Businesses In
There’s no change (yet) to the VAT thresholds:
- Registration threshold remains at £90,000
- Deregistration threshold remains at £88,000
While this sounds like stability, it has a hidden cost: frozen thresholds + inflation = more businesses dragged into VAT registration.
Tip: If your turnover is approaching £90,000 (in a rolling 12-month period), we strongly recommend a VAT review. Late registration penalties can be significant.
New Late Payment Penalties: What’s Changing from April 2025
Currently, the VAT late payment system applies surcharges and interest. From April 2025, those surcharges will become significantly harsher.
From April 2025, penalties will be:
| Days Late | Penalty (Current) | Penalty (From April 2025) |
|---|---|---|
| 15 Days | 2% | 3% |
| 30 Days | +2% (total 4%) | +3% (total 6%) |
| >30 Days | 4% p.a. ongoing | 10% p.a. ongoing |
So, a VAT bill that’s 30+ days late will now attract a 6% fixed penalty + 10% annualised rolling penalty, plus interest.
Interest on Overdue VAT: Rising in April
Currently, interest is charged at 2.5% above the Bank of England base rate. From April 2025, that margin will increase to:
- 4% above the base rate
Example:
If the base rate remains at 5.25% (as at early 2025), your overdue VAT will be charged interest at 9.25% – on top of any late payment penalties.
What This Means for Businesses
If your business:
Struggles with cash flow
Waits for customer payments before settling VAT
Has variable income (e.g. project-based work)
Uses the flat-rate or annual accounting scheme
You must plan for tighter VAT payment discipline from April 2025 — or risk paying double-digit penalties and interest.
What You Should Do Now
Review your VAT payment schedule — consider moving to direct debit to avoid missing deadlines
Forecast cash flow around VAT quarters — include a margin for late invoices or slower customer payments
Set calendar alerts for filing deadlines — don’t assume HMRC will send reminders
Speak to Merranti if you need help managing payments or switching to a different VAT scheme
Bonus: Could You Deregister?
If your business turnover is now consistently below £88,000, it may be worth considering VAT deregistration — especially for B2C businesses where VAT cannot be reclaimed by your customers.
Merranti can help you assess:
-
The compliance vs. admin cost of staying VAT registered
-
Whether deregistration would improve your profit margins
-
The timing to avoid clawback of input tax on fixed assets
Don’t Let VAT Penalties Eat Your Profits
VAT compliance is no longer just a filing task — it’s a critical risk area for businesses. With sharper penalties and interest coming in April 2025, the cost of falling behind is higher than ever.
Let Merranti help you stay ahead.
Book a VAT health check today — and stop penalties before they start.
