HMRC Hikes Late Payment Interest – What You Need to Know

Key update:

As of 6 April 2025, HMRC significantly increased the interest charged on late tax payments, rising by 1.5 percentage points, from base rate +2.5% to base rate +4%. With the Bank of England base rate currently at 4.25% (following the cut on 8 May 2025), this places the late-payment interest rate at 8.25%, effective 28 May 2025.

Why the Jump Matters:

• Encouraging timely payments: HMRC’s intention is clear, penalise late payers to protect compliant taxpayers.
• Hefty cost implications: Businesses or individuals who miss deadlines accrue interest daily. Money Week calculates that a £100,000 tax bill six months overdue could incur nearly £4,125 in interest under the new rate, compared to about £3,600 previously.

How the System Works:

• HMRC adds interest at Bank of England base rate + 4%, replacing the previous 2.5% markup.
• Repayment interest (for overpaid tax) remains unchanged: base rate −1%, with a floor of 0.5% — currently 3.25%.

Effective Timeline

It’s More than Just Interest:

• Late-payment penalties have also increased, up to 10% p.a. for VAT and MTD Income Tax starting from 1 April 2025.
• HMRC expects to generate an additional £255 million in 2025/26, rising to £260 million in 2026/27, from the combined interest and penalties package.

What You Should Do Now:

1. Prioritise prompt tax payments — the daily interest cost is steep.
2. Set up Time to Pay (TTP) agreements if a large liability is due; this can halt some penalties.
3. Monitor submissions and payments earlier — especially for MTD and VAT — to avoid interest and penalties.
4. Seek affordable external financing if bank interest is lower than HMRC’s rate — this could significantly reduce costs.
5. Challenge any errors — you can dispute interest if HMRC hasn’t processed repayments promptly.

Key Takeaway:

The message is clear: late tax payments now cost substantially more. At 8.25% interest, HMRC’s rate outpaces many commercial loans, meaning delays could hit your bottom line hard.

If you’re approaching a tax liability or foresee cash-flow strains, AEL can help: we can proactively create TTP (time to pay) plans, explore lower-cost lending options, and ensure timely MTD, VAT, and corporation tax filing.

HMRC Interest Rates