HMRC hikes interest rate for late tax payments - what it means for your tax bill

The interest rate charged on late tax payments will rise to 4% above the Bank of England base rate, the government has announced.

The news was buried in a raft of revenue-raising measures in last month’s Autumn Budget. The hike will come into effect next April, meaning that if interest rates remain at 4.75%, taxpayers face a penalty of 8.75% on late payments.

This is an increase from the current level of 2.5% above base rate (giving a total rate of 7.25%).

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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 is going up, there is “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 3.75% (it is usually 1% lower than base rate). This means that from April, assuming there is no change in the base rate, the late payment rate charged to taxpayers will be more than double (8.75%) the rate paid by HMRC to taxpayers (3.75%).

Sian Marsden, associate director at accountants RSM, comments: “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 about 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 have a £100,000 bill arising as of 31 January 2025 after filing your self-assessment tax return.

According to RSM, the current 7.25% interest rate means daily interest will accrue of £19.86 for each day it remains unpaid.

As of 6 April 2025, this will increase to £23.97 per day.

If you only started paying the tax bill in May, and it took six months (180 days) to pay off, you would fork out £4,314.60 in interest, assuming the rate is 8.75%.

If the interest rate remained at 7.25%, the total interest would be lower at £3,574.80.

How to avoid the charge

Taxpayers that are struggling to pay what they owe to HMRC sometimes enter a Time to Pay arrangement. These are monthly payments that cover all outstanding amounts overdue, including penalties and interest.

However, with a higher interest rate coming in next April, it may not be the best option for some taxpayers to agree a Time to Pay arrangement, according to Marsden.

“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.

“The 31 January deadline is approaching quickly, so filing tax returns early can mean that conversations start quickly where taxpayers are unable to pay the full debt immediately. This will stop HMRC taking further action to collect debts and could mean that current interest rates are locked in (although this is not guaranteed).”

MoneyWeek has approached HMRC to find out if this is the case.

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 when the base rate was just 0.1%.

So, to jump to an expected 8.75% charge next April 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 further, 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.”

Will higher interest 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.