HMRC has charged £513 million in interest on the late payment of income tax since 2020. The new figures come shortly after it hiked the interest rate on overdue tax payments to its highest level since August 2007.
The interest rate charged on late tax payments after three months rose to 4% above the Bank of England base rate on 6 April. Previously, interest was levied at 2.5% above base rate.
The news was buried in a raft of revenue-raising measures in October 2024's Autumn Budget. A further increase to late payment penalties for those filing their tax return late was announced in March’s Spring Statement.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
More than a million people missed the self-assessment tax return deadline on 31 January this year.
The taxman received 11.5 million tax return forms online by the deadline but an estimated 1.1 million missed the cut-off.
Those people would receive an automatic £100 penalty, plus further fines depending on how late they submit their tax return and pay any tax due. Late payment of income tax also incurs interest, which jumped to 4% above base rate from April 2025. Currently the interest rate is a hefty 8.25%.
HMRC has raked in £513 million in interest on overdue payments since April 2020, a Freedom of Information (FOI) request submitted by financial advisory firm NFU Mutual has now revealed.
In 2022/23 interest receipts reached £252 million, more than double the amount collected (£114 million) two years prior.
Sean McCann, chartered financial planner at NFU Mutual, said: “The change in April saw the interest on late tax payments rise to 8.5% to its highest level since August 2007 – even with the recent reduction in the base rate, an interest rate of 8.25% is a heavy charge on taxpayers who pay late.
“Late payment interest accrues daily from the date the payment is due, so this increase makes it even more crucial to pay your tax on time.”
HMRC says the rise in late payment interest is a way of encouraging taxpayers to pay what they owe more quickly, for example, people who have submitted a tax return and are late paying their tax bill.
However, Robert Salter, director at the accountancy firm Blick Rothenberg, tells MoneyWeek that the change feels like a “hidden tax rise”.
He points to the fact that while the late payment interest rate has risen, there has been “no equivalent change in the repayment supplement which HMRC pays to those taxpayers who have overpaid taxes and are entitled to a refund”.
The repayment interest rate is currently 3.25% (it is usually 1% lower than base rate). This means the late payment rate charged to taxpayers is currently more than double (8.25%) the rate paid by HMRC to taxpayers (3.25%).
Sian Marsden, associate director at accountants RSM, said: “There is an increasing number of taxpayers sat waiting endlessly for HMRC to process overpayments of tax, with no means of chasing and HMRC advising that some repayments could take over a year to process.
"Surely if HMRC is going to get a bigger bite of the cherry, the taxpayer should also be compensated for suffering ongoing delays?”
How the late tax payment charge works
Let’s say you had a £100,000 bill arising as of 31 January 2025 after filing your self-assessment tax return.
According to RSM, the 7.25% interest rate that was in force at the start of this year meant daily interest of £19.86 would accrue for each day it remains unpaid.
As of 6 April 2025, this increased to £23.97 per day.
If you only started paying the tax bill last week, and it took six months (180 days) to pay off, you would fork out about £4,125 in interest, assuming the interest rate remains 8.25%.
In contrast, if the interest rate was 7.25%, the total interest would be lower at about £3,600.
How to avoid the charge
It is too late to avoid the £100 penalty now if you have missed the deadline to file your tax return for the 2023/2024 tax year.
Taxpayers that are struggling to pay what they owe to HMRC can sometimes enter a Time to Pay arrangement but this has to be agreed before the 31 January deadline. These are monthly payments that cover all outstanding amounts overdue, including penalties and interest.
Marsden comments: “Some may seek financial advice to see if there are better options and interest rates available, especially if they are able to obtain lending from a bank at a lower rate than HMRC’s. Maybe this was one of the intentions behind the increase, but HMRC should be seeking to support taxpayers; the increase in the interest rate seems to contradict this.
“Those in the worst financial straits, unable to secure more affordable debt, could be worst hit.”
She adds that the most important thing for any taxpayer who is unlikely to be able to meet a tax bill is to engage with HMRC as soon as possible.
McCann echoes this, saying it’s vital to speak to the tax authority as the interest and fines can really stack up: “A penalty of 5% of the tax due is normally charged 30 days after the due date.
“An additional 5% penalty is charged on sums outstanding after six months with a further 5% penalty on any tax outstanding 12 months after the due date.”
Is the interest rate hike fair?
It wasn’t that long ago that the late tax payment interest rate was set at 2.6%. This was in April 2020, when the base rate was just 0.1%.
So, an interest rate of 8.25% is a lot more severe.
Salter reckons the taxpayers who are “most likely to be caught by the increased interest charge are the most honest taxpayers, who are trying to settle their taxes and are simply having to pay this – often with the formal agreement of HMRC – over a period of time”.
According to Andy Chamberlain, policy director at the Association of Independent Professionals and the Self-Employed (IPSE), “the real concern is that by increasing the HMRC interest rate, the government might be strong-arming taxpayers into accepting charges that they really should be disputing”.
He explains: “Should HMRC decide you underpaid tax four years ago, the interest will accrue from then on, not when HMRC raised the inquiry or started their investigation.
“If the taxpayer disputes the charge, it could take further years to resolve, and the total interest bill will be significant - even more so now that it’s been hiked to almost double figures.”
The government estimated in its Autumn Budget that it expects to receive an additional £255 million in 2025/26 and £260 million in 2026/27 by introducing the higher interest rate on unpaid tax from 6 April, 2025.
Will a higher interest rate incentivise tax avoiders to pay what they owe?
Salter questions whether the change will have any effect on “delinquent taxpayers” who choose not to settle the taxes they legitimately owe to HMRC.
“If individuals are clearly breaking the law – and those who can but don’t pay their taxes are acting in an unlawful manner - simply increasing the interest that they need to pay won’t, in my honest opinion, really change that behaviour,” he comments.
-
NFU Mutual and M&S among most trusted insurers as big brands beat smaller rivalsValue for money is a big concern for customers buying insurance, helping to send overall trust scores down to a four year low
-
Millions of shoppers can claim up to £70 compensation – do you qualify?Millions of shoppers will be able to claim their share of a £200 million settlement from Mastercard. We explain who's eligible, how the process will work, and when you could get the money
