HMRC Interest on Late Payments: Understanding the Consequences and How to Avoid Penalties

Date: April 6, 2025

HMRC Interest on Late Payments has today increased, following a change in how it is calculated. When tax liabilities are not paid on time, HMRC imposes interest and penalties, which can significantly increase the total amount owed. In this article, we will explore the impact of HMRC interest on late payments, the potential fines and penalties, and provide strategies to help businesses and individual taxpayers avoid unnecessary costs.

What is HMRC Interest on Late Payments?

HMRC charges interest on late payments of taxes, which can include income tax, National Insurance contributions, corporation tax, VAT, and other duties. This interest is calculated daily from the due date of the payment until the tax is paid in full. The rate of interest is regularly updated in line with the Bank of England’s base rate, and these rates are usually higher than those found in commercial lending, meaning that late payments can be expensive.

The purpose of charging interest on late payments is to encourage timely compliance with tax obligations. HMRC aims to ensure fairness in the tax system by discouraging late payments and preventing businesses and individuals from gaining an unfair advantage by delaying their tax payments.

HMRC’s Interest Rate Increase: What it Means for Taxpayers and Businesses

As part of its ongoing efforts to maintain the stability of the UK tax system, the government announced at Autumn Statement 2024 that HMRC will increase its interest rates for late payments, effective from April 2025. This change is likely to have significant implications for both individual taxpayers and businesses alike. In this article, we’ll examine the reasons behind the interest rate increase, how it may impact taxpayers, and provide guidance on managing this development.

Overview of HMRC’s Interest Rate Increase

HMRC adjusts its interest rates periodically in response to the Bank of England’s base rate. The latest interest rate increase follows a series of adjustments by the Bank of England as part of its monetary policy to curb inflation. When HMRC increases its rates, it impacts the amount of interest charged on overdue tax liabilities as well as the interest payable on overpaid tax.

For the past several years, HMRC’s interest rate on late payments and underpaid tax has seen a significant rise. This increase applies to various tax payments, including:

Income tax (for self-assessment taxpayers)
National Insurance contributions
Corporation tax
VAT (for businesses paying late)

HMRC Late payments interest rates increases from April 2025

The HMRC late payment interest rate on unpaid tax liabilities is being increased by 1.5 percentage points, from 6 April 2025. Based on the current rate, this would mean a late interest charge of 9% as the rate will be set at base rate plus 4%.

From 6 April 2025, late payment interest is set at base rate plus 4% (this was previously plus 2.5% on or before 5 April 2025). Repayment interest, is currently set at base rate minus 1%, with a lower limit of 0.5% (also known as the ‘minimum floor’)

This means that on 6 April 2025, late payment interest rate is now at 8.5%. Repayment interest rate is 3.50% (from 25 February 2025). Historic interest rates can be found on HMRC’s website here

Understanding HMRC Fines for Late Payments

In addition to interest, HMRC also applies fines or penalties for late payments. These fines are often triggered by significant delays in settling your tax obligations. The specific nature of the fines varies depending on the type of tax owed and the length of the delay.

For example, if a taxpayer is late with self-assessment income tax, the penalties can escalate as time passes. An initial fine of £100 is imposed if the payment is one day late. This fine increases significantly if the tax remains unpaid for longer periods. HMRC’s late payment penalties are structured to increase in severity based on how long the payment has been overdue:

1 day late: A £100 fixed penalty for income tax or National Insurance contributions.
30 days late: Additional penalties are applied, typically starting at 5% of the tax due.
6 months late: Further penalties of 5% on the outstanding tax are charged, adding up to a substantial increase in the overall liability.

These penalties not only affect individuals but also apply to businesses that fail to meet their tax obligations on time. The fines can quickly add up, especially for large sums of overdue tax, making it essential to avoid delays.

VAT Penalties for Late Payments

VAT is one of the most common areas where businesses face HMRC penalties. HMRC requires businesses to pay VAT on time, typically quarterly or annually. If a business fails to meet the deadline for VAT payments, they will be subject to both interest charges and penalties.

For VAT, HMRC’s late payment penalties are often more severe compared to other taxes. A business that is late in submitting or paying its VAT will incur interest on the overdue amount. The penalty is generally calculated on a sliding scale, depending on the length of the delay and the tax amount owed. In some cases, businesses may also be required to pay a surcharge for late payment, which can be up to 15% of the overdue VAT amount, depending on how many times late payments occur within a set period.

The key factors that determine the level of VAT penalties include:

The amount of VAT due
The duration of the delay in payment
Whether the business has a history of late payments
Whether the business has made arrangements for payment through an HMRC Time to Pay agreement

Businesses should ensure they maintain accurate records of their VAT payments and submissions to avoid penalties. Working with an accountant to ensure timely VAT filings and payments can significantly reduce the risk of incurring penalties.

The Importance of Timely Payments: Strategies to Avoid HMRC Late Payment Interest and Penalties

Understanding the implications of late payments and interest charges is crucial for managing tax liabilities effectively. The following strategies can help businesses and individual taxpayers avoid HMRC fines for late payment and ensure they stay compliant with tax regulations:

Plan Ahead and Be Aware of Deadlines

The best way to avoid late payment penalties and interest charges is to stay ahead of tax deadlines. Use a calendar or accounting software to track payment due dates for taxes such as VAT, corporation tax, income tax, and National Insurance. Setting up automatic reminders will help you stay on top of your obligations.

Consider Spreading Payments with Time to pay arrangements

If you’re struggling with a lump sum tax bill, contact HMRC early to discuss a payment plan. HMRC offers Time to Pay arrangements, which allow taxpayers to spread their tax liabilities over a longer period. This can help ease cash flow pressure and prevent late payments.

Maintain Proper Accounting Records

Ensuring that your financial records are accurate and up to date is crucial for meeting payment deadlines. Having a clear understanding of your tax position will help you avoid errors and reduce the likelihood of missed payments. This is especially important for businesses that must submit VAT returns and pay other taxes on time.

Work with a Professional Accountant

Tax compliance can be complex, particularly for businesses that need to manage multiple tax payments. Engaging an accountant/tax advisor such as Alexander & Co can ensure that all returns are filed accurately and on time. We can also help you with cash flow planning and advise on strategies to reduce tax liabilities.

Respond Promptly to HMRC Notices

If you receive a letter or notice from HMRC about an overdue payment, it is crucial to respond promptly. HMRC may offer additional time or alternative payment arrangements if you make contact early. Ignoring the notice can result in higher penalties and interest charges.

Set Up Direct Debit Payments

Setting up direct debit payments can help ensure that tax liabilities, particularly for VAT, are paid on time. This eliminates the risk of forgetting to make a payment and helps with cash flow management.

HMRC Interest on Late Payments – A Summary

HMRC interest on late payments and HMRC late payment penalties can have serious financial consequences, particularly for businesses that rely on consistent cash flow. By understanding the penalties, keeping track of deadlines, and working with a professional to manage your tax obligations, you can avoid unnecessary fines and protect your financial position.

For businesses and individuals alike, the key to managing HMRC fines for late payment is to act proactively. Whether it’s ensuring timely payments, setting up time to pay arrangements, or seeking professional advice, these actions can help mitigate the financial impact of late payment interest and penalties.

Alexander & Co – expert tax advice

For professional tax advice on this or on other related issues, we can provide a quote to assist. To contact Alexander & Co, email info@alexander.co.uk . Alternatively, simply fill out the form below and a member of our property team will be in touch.