HMRC has decided to reduce the interest rates for late tax payments following the recent decrease in the Bank of England’s base rate. The Bank of England has lowered its base rate from 4% to 3.75%, which is beneficial for borrowers and individuals with outstanding tax obligations to HMRC.
For self-assessment taxpayers, HMRC typically imposes an interest charge on late tax payments, currently at 8%. However, this rate will be reduced to 7.75% effective from January 9, 2026. Late payment interest is calculated as the base rate plus 4%, while the repayment interest, which HMRC pays when taxpayers have overpaid or are due a refund, will now be set at 3.5%.
The repayment interest rate is determined as the base rate minus 1%, with a minimum limit of 0.5%. These adjustments in interest rates are directly linked to the changes in the Bank of England’s base rate.
These rate revisions come just before the upcoming deadline for self-assessment tax returns on January 31. Failure to file online by this date incurs an immediate £100 fine, which can escalate to £10 per day up to a maximum of £900 after three months of delay. Subsequently, after six months, a penalty of 5% of the tax owed or £300, whichever is higher, is applied, and this cycle repeats every 12 months.
It is crucial to settle any tax liabilities by January 31 to avoid incurring late interest charges. Delayed payments can result in additional penalties of 5% of the unpaid tax after 30 days, with further fines at six months and 12 months.
Individuals facing difficulties in paying tax bills, with amounts under £30,000, may explore the option of setting up a payment plan with HMRC called “Time to Pay.”
If you fall under the categories of being self-employed, earning supplementary income apart from your primary job, receiving rental income, or being a high-income earner claiming Child Benefit, you are required to submit a self-assessment.
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