Following changes to legislation, HM Revenue & Customs (HMRC) has revised the way it calculates interest on late and early payments, linking it more closely with the Bank of England base rate.
The change increases the cost of missing a payment deadline, something every taxpayer should take seriously.
What is the new late payment interest rate?
HMRC interest rates are set in legislation and move in line with the Bank of England base rate.
As of 6 April 2025, the late payment interest rate was increased to:
- Base rate + four per cent (Previously – Base rate + 2.5 per cent)
This new rate will apply to most taxes, including Income Tax, Corporation Tax, VAT, and others where HMRC charges interest on late payments.
In real terms, with the base rate currently at 4.5 per cent, this puts the late payment interest rate at 8.5 per cent, a considerable cost for missing deadlines.
What about repayment interest?
If you overpay your tax or are due a repayment from HMRC, the interest you receive is also linked to the base rate, but at a much lower margin:
- Base rate – one per cent, with a minimum floor of 0.5 per cent
This means that you will continue to receive 0.5 per cent unless the base rate rises above 1.5 per cent.
While this protects taxpayers from earning nothing when base rates are low, it also means that, even with interest rates at a multi-year high, HMRC repayments remain relatively meagre in comparison to the cost of paying late.
What about Corporation Tax instalments?
For large companies paying Corporation Tax by quarterly instalments, the interest charged on underpaid instalments has risen too.
Previously 5.5 per cent, this rate is now seven per cent.
This change reinforces the need for careful planning and accurate forecasting when it comes to Corporation Tax obligations.
Why has HMRC made these changes?
The Government aims to encourage prompt payment and ensure fairness for those who meet their tax obligations on time.
The increased penalty margin is designed to act as a deterrent for late payment.
At the same time, the repayment interest is deliberately lower, in line with how many tax authorities operate internationally, and broadly consistent with commercial borrowing and deposit rates.
What should taxpayers do now?
With interest rates at their highest levels in years and HMRC tightening its grip on late payments, this is the time to:
- Check your payment schedules and diarise key deadlines
- Ensure you have sufficient cash flow to meet tax obligations on time
- Review your approach to instalment payments if you are affected by Corporation Tax changes.
The cost of delay is higher than ever and avoidable in many cases.
Need help reviewing your tax deadlines or planning your payments more effectively?
Our team is here to help. Contact us today for tailored advice and support.
