Virtual image of a spotlight casting light from above on the words "debt collection"
The spotlight is firmly back on debt collection

In the Spring Statement, the Government unveiled a series of bold measures aimed at reducing tax debt and closing the tax gap. These initiatives are set to raise over £1 billion in additional tax revenue annually by 2029/30, as the Government takes more decisive steps to tackle the £44 billion of unpaid tax liabilities.

The measures mark a significant shift in how HMRC handle debt collection, with a combination of reintroducing previously paused processes and exploring new methods of collection.

Debt recovery

At the heart of these changes is the resumption of HMRC’s direct recovery of tax debt process, which has been suspended since the onset of the COVID-19 pandemic. Introduced nearly a decade ago, this process allows HMRC to recover debts directly from the bank accounts of individuals and businesses with tax liabilities exceeding £1,000. The system ensures that taxpayers are left with at least £5,000 across all their accounts, providing a safeguard against excessive recovery. Now, with the process being brought back, the Government is also exploring ways to automate the collection of smaller debts, streamlining the process and enhancing efficiency.

In addition, the Government is making significant investments in HMRC’s infrastructure, with plans to recruit 600 new debt management staff and a further 500 HMRC compliance staff over the next five years, aimed at bolstering HMRC’s ability to close the tax gap and to tackle outstanding debts. Further initiatives include an innovative test-and-learn pilot targeting older debts and a shift towards more automated debt recovery.

Alongside this, £87 million will be invested into strengthening partnerships with private sector debt collection agencies, enhancing the agency’s capacity to chase down unpaid taxes.

Increasing interest rates and late payment penalties

The Government isn’t stopping there though. As of the 6 April 2025, HMRC have increased interest rates for late payments by 1.5%, from 7% to 8.5%, across all taxes.

Additionally, late payment penalties for VAT and income tax paid under Making Tax Digital (MTD) have increased significantly.

  • A 3% (previously 2%) charge will apply if tax is overdue by 15 days.
  • With an additional 3% (previously 2%) added if it’s overdue by 30 days.
  • For payments overdue by 31 days or more, the penalty jumps significantly from 4% per annum to a substantial 10% per annum.

The changes will take effect as follows:

  • VAT: From April 2025
  • Income tax: From the tax year the taxpayer signs up for MTD.

These changes are designed to encourage timely payments and deter habitual late payers from delaying their tax obligations.

Payment plans

The Government is also turning its attention to the compliance challenges faced by smaller businesses, which often fall behind on tax payments due to cash flow difficulties. To address this, HMRC will roll out more accessible payment plans and provide businesses with clearer guidance, ensuring they have the tools they need to stay on track.

The Government’s renewed focus is about creating fairness and efficiency. By harnessing technology to streamline debt collection and targeting those who have been falling behind, the Government aims to boost tax revenues, reduce the tax debt, and ensure that everyone contributes their fair share.

 

This article reflects the position at the date of publication. If you are reading this at a later date you are advised to check that that position has not changed in the time since. 

We regularly publish articles on a range of tax and wider topical issues which affect employers. If you wish to subscribe to our monthly Employer Focus e-newsletter, please contact us.