HMRC has decided to lower the interest rates on overdue tax payments following the recent reduction of the Bank of England’s base rate. The Bank of England recently decreased its base rate from 4% to 3.75%, benefiting numerous borrowers and individuals with outstanding tax liabilities to HMRC.
For self-assessment taxpayers, HMRC currently imposes an 8% interest rate on late tax payments, which will now be reduced to 7.75% effective January 9, 2026. The interest rate for late payments is calculated as the base rate plus 4%. Moreover, HMRC is also lowering the repayment interest rate to 3.5%, which is computed as the base rate minus 1%, with a minimum threshold of 0.5%.
The adjustments in interest rates by HMRC are directly linked to the Bank of England’s base rate modifications. These changes precede the upcoming deadline for self-assessment tax returns on January 31. Failure to file tax returns online by this date incurs an immediate £100 penalty, escalating to £10 per day up to a maximum of £900 after three months. Subsequently, if the tax return remains unfiled after six months, a penalty of 5% of the tax owed or £300, whichever is higher, is imposed, with a repeat of penalties after 12 months.
Late interest charges commence on outstanding tax amounts after January 31. Additionally, a further 5% penalty of the unpaid tax is levied after 30 days, with recurring penalties at six months and 12 months. Individuals facing difficulty in paying tax bills under £30,000 can explore the option of setting up a payment plan with HMRC through the “Time to Pay” scheme.
If you fall under the categories of being self-employed, earning supplementary income beyond your primary employment, deriving income from property rentals, or being a high-income earner claiming Child Benefit, you are required to submit a self-assessment tax return. These measures aim to facilitate smoother tax compliance and payment processes for taxpayers.