Changes to VAT penalties

From 1 January 2023 the penalties for VAT late filing and late payment are changing. The previous default surcharge regime will be replaced by a points based system.

The new late filing penalties will be points based. Taxpayers will get a penalty point for each VAT return that is filed late. If you file VAT returns quarterly then there is a £200 fixed penalty once you reach four penalty points in a two year period.

There will be two separate penalties, based on how late the payment is –

• A first penalty of 2% of the unpaid VAT and a further 2% of the VAT unpaiud at day 30
• A second penalty starting at day 31, charged daily based on an annual rate of 4% of the outstanding amount

Agreeing a Time to Pay arrangement with HMRC will effectively stop the clock and the interest. So agreeing a TTP arrangement before the debt is 15 days old will mean that there is no interest chargeable.

The government has again delayed the start of MTD ITSA to 6 April 2024, with MTD for general partnerships postponed to 2025. The change to the tax year basis has also been delayed until at least April 2024.

From April 2022 the government will introduce a UK-wide 1.25% Health and Social Care Levy, based on national insurance contributions (NIC) ringfenced to fund the investment in health and social care.

The levy will apply to the same population and income as class 1 (employee, employer) and class 4 (self-employed, including partners) NIC, and to the main and higher rates.

From April 2023 onwards, the levy will also apply to those above state pension age who are still in employment.

The increase will not apply to class 2 NIC (the flat rate paid by the self-employed with profits above the small profits threshold, which is currently £6,515 per year) or class 3 NIC (voluntary contributions for taxpayers to fill in gaps in their contributions’ records to qualify for benefits). So, the lowest paid self-employed and people making voluntary contributions will be protected.

Employers will pay the levy for employees earning above the secondary threshold of £8,840 in 2021/22. Existing NIC reliefs to support employers will apply to the levy.

The levy will be administered by HMRC and collected by the current channels for NIC: pay as you earn and income tax self-assessment.

Additional rate taxpayers make up just 2% of individuals affected but will contribute nearly 20% of the revenue raised from individuals. The highest earning 14% will pay around half the revenues.

Dividend tax increase

Alongside the Health and Social Care Levy, the government has announced that, from 1 April 2022, there will also be a 1.25% increase in dividend tax rates: 

• for a basic rate taxpayer, the rate will increase from 7.5% to 8.75%
• for a higher rate taxpayer, the rate will increase from 32.5% to 33.75%
• for an additional rate taxpayer, the rate will increase from 38.1% to 39.35%.

The £2,000 dividend allowance will remain.

Dividend tax is charged on taxable dividend income an individual receives that falls outside of the personal allowance (£12,570 in 2021/22) and the dividend allowance (£2,000 in 2021/22). Taxable dividend income excludes, for example, dividends on assets held in ISAs.

Affected basic rate taxpayers are expected to pay, on average, an additional £150 on their dividend income in 2022/23. Affected higher rate taxpayers are expected to pay, on average, an additional £403 on their dividend income in 2022/23. Additional and higher rate taxpayers are expected to contribute over 70% of the revenue from this increase in 2022/23.