HMRC has decided to lower the interest rates applied to 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%, which benefits borrowers and individuals with outstanding tax obligations to HMRC.
For self-assessment taxpayers, HMRC imposes interest charges on late tax payments. The current rate of interest on overdue payments stands at 8%, but it will be reduced to 7.75% starting on January 9, 2026. Late payment interest is calculated at the base rate plus 4%, while repayment interest, which HMRC pays out when individuals have overpaid taxes, is being lowered to 3.5%.
Repayment interest is determined by the base rate minus 1%, with a minimum threshold set at 0.5%. These adjustments in interest rates are directly linked to the changes in the Bank of England’s base rate, as highlighted on the HMRC website following the Bank’s decision to decrease its base rate.
The timing of these changes aligns with the approaching deadline for self-assessment tax returns on January 31. Failure to file online by this date results in an immediate £100 penalty, which can escalate to daily fines of £10, up to a maximum of £900 after three months. Subsequently, after six and twelve months, additional penalties are imposed based on a percentage of the tax owed or a fixed amount, whichever is higher.
Individuals must settle any outstanding tax amounts by January 31 to avoid incurring late interest charges. Delays in payment can lead to extra fines equivalent to 5% of the unpaid tax after 30 days, with recurring penalties at the six-month and twelve-month marks.
If managing the tax bill becomes challenging and the amount owed is less than £30,000, individuals have the option to arrange a payment plan with HMRC through the “Time to Pay” scheme. Additionally, certain criteria necessitate the submission of a self-assessment, including self-employment, supplementary income sources, property rental earnings, or being a high-income earner claiming Child Benefit.
