HMRC has decided to lower the interest rates for overdue tax payments following a recent reduction in the base rate by the Bank of England. The Bank of England has 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 be reduced to 7.75% starting January 9, 2026. Late payment interest is currently calculated as the base rate plus 4%, while the repayment interest paid by HMRC for overpaid taxes or refunds owed is being adjusted to 3.5%.
The repayment interest rate is determined as the base rate minus 1%, with a minimum threshold of 0.5%. These changes align with the recent adjustment in the Bank of England base rate, as HMRC’s interest rates are directly linked to this benchmark rate.
These modifications precede the upcoming deadline for self-assessment tax returns on January 31. Failure to submit your tax return online by this date incurs an immediate £100 penalty, which can escalate to £10 per day up to a maximum of £900 after three months of delay. Further penalties are imposed at the six-month and twelve-month marks for late filings.
Late interest charges commence after January 31 for any outstanding tax amounts, with additional penalties of 5% of the unpaid tax after 30 days, repeating at the six-month and twelve-month intervals. Taxpayers facing difficulties in settling their tax obligations, with debts under £30,000, may be eligible for a payment arrangement with HMRC through the Time to Pay scheme.
Individuals who are self-employed, earn supplemental income, derive rental income, or are high earners claiming Child Benefit may be required to submit a self-assessment tax return. These guidelines aim to streamline the tax payment process and ensure compliance with HMRC regulations.