Interest on tax paid late

HMRC interest on tax paid late has greatly increased recently. As the Bank of England base rate recently increased, HMRC has raised its interest rates on late tax bills to 4.25%. That’s the highest level  since January 2009.

HMRC interest rates are shown in the following tables

The current late payment and repayment interest rates applied to the main taxes and duties that HMRC currently charges and pays interest on are:

• late payment interest rate — 4.25% from 23rd August 2022
• repayment interest rate — 0.75% from 23rd August 2022

Here’s how interest rates are set

HMRC interest on tax paid late are set in legislation and are linked to the Bank of England base rate. There are 2 rates:

• late payment interest, set at base rate plus 2.5%
• repayment interest, set at base rate minus 1%, with a lower limit of 0.5% (known as the ‘minimum floor’)

HMRC say, ‘the late payment interest rate encourages prompt payment. It ensures fairness for those who pay their tax on time. The repayment interest rate compensates taxpayers fairly, when they overpay or pay early, for loss of use of their money’.

Possible future increases

Since the start of 2022, the HMRC’s interest rate has increased by 1.5% – that’s the equivalent of an extra £225 per year on a £15,000 tax liability. On the same £15,000 tax liability, you would be charged almost £650 of interest each year. Some economists project that the Bank of England could decide to increase the base rate to 2.5% by the end of 2022 – this could see HMRC interest on late paid tax increasing to 5% by the end of the year. Anyone with outstanding tax liabilities should think about paying as much as they can afford before the rate rise again.

HMRC have also increased the repayment supplement rate by 0.25% to 0.75% – the first increase in over a decade. That means that HMRC have increased the rate for late paid tax by six times the amount the equivalent repayment interest rate has gone up by this year. That means there is much less incentive for HMRC to release repayments than for taxpayers to make propt payment.

One rule for them …

When it comes to HMRC interest on tax paid late, there continues to be one rule for HMRC and another for taxpayers who are due a refund. Many taxpayers have seen very significant delays to repayments over the last couple of years, but HMRC can continue to move slowly with little cost to the Treasury.