HMRC interest rate for late payments is now at 7.75% – avoid extra charges

The HMRC Interest rate for late payments has today increased to 7.75%. This is following the latest base rate increase from the Bank of England. This is the highest rate late payment charges have been since 2007, at the height of the financial crisis.

For anyone with outstanding tax liabilities, this can add a significant burden to their tax bills and they should consider how these higher interest rates will affect then. Below we explain how HMRC calculates its interest rates. We also highlight some areas taxpayers can review, to help ensure they minimise any potential late payment charges.

Self Assessment payments on account and 2022/23 tax filing

For anyone with a payment on account due on 31 July which is still outstanding, late payments would now see interest added at the 7.75% rate. However, for some taxpayers, the amount required for a payment on account can be reduced. Where taxable income is lower in the 2022/23 tax year, than the previous year, a taxpayer can request a reduced payment on account from HMRC.

To do this, they need to complete their Self Assessment Tax Return as early as possible. (Whist the deadline for Self Assessment is 31 January, these can be completed as early as 6 April the year prior).

Further information on this can be found here: Filing Self Assessment tax returns early – the benefits

Capital gains tax on residential property

Since 27 October 2021, any capital gains on residential property needs to be calculated, reported and paid to HMRC within 60 days of the completion of the sale. Given the recent reduction in the capital gains tax annual allowance to £6,000 from April 2023, and the fact that many property sales attract significant capital gains tax liabilities (such as second home sales and rental property), late payments here can incur significant interest charges.

Further information on this can be found here: Capital gains tax on residential property – the 60 day rule

Outstanding tax liabilities, yet to be agreed with HMRC – caution with the higher HMRC interest rate

Anyone who has an outstanding tax liability yet to be agreed with HMRC, interest is charged from the date payment was due. This is  rather than when agreement is reached with HMRC. With HMRC late interest now at such a high rate, ensuring agreement is reached as soon as possible and the liability is agreed for the lowest available amount is crucial.

Alexander & Co can assist clients with negotiating outstanding liabilities with HMRC and with Time to Pay arrangements. More information on this can be found here: Agreeing outstanding tax liabilities with HMRC and Time to Pay arrangements

How are HMRC interest rates set?

HMRC interest rates are set in government legislation which is linked to the Bank of England’s base rate. For late payment interest, this is set at the Bank of England base rate plus 2.5%.

For repayment Interest, this is set at the bank of England base rate less 1%. A lower limit of half a percent also applies, which is known as the ‘minimum floor.’

HMRC believes that the late payment interest rate helps to encourage quick payment and provides fairness for taxpayers paying on time.

HMRC interest rates – the lower limit for repayment interest

Where taxpayers have an overpayment of tax, the lower limit for repayment interest is to ensure that they continued to get 0.5% interest. This applies even when the base rate fell below this rate.

Repayment interest is paid at 0.5% until such time that the BoE raises the base rate above 1.5%. At this point, it will then increase with the base rate.

Why are HMRC interest rates for late payment and repayment different?

HMRC explains that the difference between its interest rates is in line with policy for other tax authorities globally. It also states that this compares favourably with commercial practice where interest is charged on overdrafts or loans as well as interest paid on deposits.

Current HMRC late payment interest and repayment interest rates

The current HMRC official rate of interest for late payment and repayment interest rates applied to the main taxes and duties that HMRC charges and pays interest on is as follows:

HMRC late payment interest rate — from 22 August 2023: 7.75%
HMRC interest rate — from 22 August 2023: 4.25%

Advice to minimise late payment interest charges

The simplest way to avoid late payment interest is to make sure that you are up to date with any tax payments. Also make sure all returns are filed in a timely manner, as soon as possible. Alexander & Co can assist in taking care of this on your behalf.

We advise a wide range of clients globally on their UK tax liabilities. This is in matters as diverse as Self Assessment, Capital Gains Tax, Corporate tax issues and HMRC enquiries.

For those with outstanding tax liabilities, we can assist in correctly calculating and agreeing this with HMRC. We can also discuss Time to Pay arrangements with HMRC.

To discuss how we can assist you, please complete the enquiry form on this page. Alternatively, you can email info@alexander.co.uk for further information. With offices in London and Manchester, we can assist clients nationwide as well as further afield.