As of 6 April 2025, late tax payments are now subject to an 8.5 per cent interest rate, following an HMRC update that ties rates more closely to the Bank of England base rate.
This follows a legislative change that ties HMRC’s interest calculations more closely to the Bank of England’s base rate.
Revised late payment charges
The late payment rate is now set at the base rate plus four per cent, up from the previous margin of 2.5 per cent.
With the Bank of England base rate currently at 4.5 per cent, this results in a steep 8.5 per cent charge on overdue tax payments.
This change applies to a wide range of taxes, including:
- Income Tax
- Corporation Tax
- VAT
- Other HMRC-administered taxes where interest applies
Repayment interest still lags behind
While late payers face higher charges, those due a repayment will see no comparable benefit.
HMRC’s repayment interest rate is calculated as the base rate minus one per cent, with a minimum rate of 0.5 per cent.
Unless the base rate exceeds 1.5 per cent, the repayment rate will remain at this minimum threshold.
Even now, with interest rates at multi-year highs, the return on tax overpayments remains minimal.
Corporation Tax instalment interest also increases
Larger businesses paying Corporation Tax via quarterly instalments will also feel the effects.
Interest on underpaid instalments has increased from 5.5 per cent to seven per cent.
This highlights the need for cash flow planning and timely payments, especially for companies on the instalment regime.
Why have the Government made these changes?
The Government is aligning HMRC’s rates more closely with commercial lending norms.
The increase aims to:
- Deter late payment
- Ensure fairness for compliant taxpayers
- Reflect broader economic conditions
The approach is broadly in step with international tax norms, where repayment interest is often lower than charges on late payments.
To avoid unnecessary costs under the new rules, taxpayers should consider:
- Reviewing upcoming payment deadlines and building them into internal processes
- Ensuring cash flow planning accounts for upcoming tax liabilities
- Revisiting Corporation Tax forecasting, particularly for those paying by instalment
Avoiding interest charges is achievable with the right preparation.