HMRC has decided to lower the interest rates on overdue tax payments following the recent decrease in the Bank of England’s base rate. The Bank of England has reduced its base rate from 4% to 3.75%, benefiting numerous borrowers and individuals with outstanding tax liabilities to HMRC.
For self-assessment taxpayers, HMRC imposes an interest rate of 8% on late tax payments, which will now be reduced to 7.75% starting from January 9, 2026. Late payment interest is currently calculated at the base rate plus 4%, while HMRC’s repayment interest for overpaid taxes or refunds is being adjusted to 3.5%.
Repayment interest aligns with the base rate minus 1%, with a minimum threshold of 0.5%. These modifications in interest rates coincide with the Bank of England’s decision to lower its base rate, affecting HMRC’s interest charges for late payments and repayments.
These adjustments precede the impending deadline for self-assessment tax returns on January 31. Failing to file online by this date results in an immediate £100 penalty, which can escalate to £10 per day up to a maximum of £900 after three months. Subsequently, after six months, a penalty of 5% of the outstanding tax or £300, whichever is greater, is imposed, and this cycle repeats after 12 months.
It is essential to settle any tax obligations by January 31 to avoid incurring late interest charges. After 30 days, an additional penalty of 5% of the unpaid tax is imposed, which recurs at six months and 12 months for delinquent payments. Individuals struggling to pay tax bills under £30,000 may qualify for HMRC’s Time to Pay program to arrange installment payments.
Certain individuals, such as the self-employed, those with additional income sources, landlords, high earners claiming Child Benefit, may need to submit a self-assessment. These guidelines aim to streamline tax compliance processes for various taxpayers.