HMRC late payment interest warning as the current rate increases to 6%

HMRC late payment interest rates have again increased, meaning the rate is now 6%. With several increase in 2022, this new figure of 6% is significant to anyone who owes HMRC tax. Both individuals and businesses who are affected by rate rise should carefully consider their options and take advice where required.

Given the impact that 6% interest could bring (and potential further increases, if the Bank of England base rate is to increase further) it is more important than ever to ensure that any tax owed is calculated correctly and both businesses and individuals are only paying the correct amount of tax they ought to.

HMRC Late Payment interest – how are interest rates set by HMRC?

HMRC Late Payment interest rates are linked to the base rate set by the Bank of England.  When the Bank of England increased the base rate from 3% to 3.5% on 15 December 2022, this triggered yet another increase in interest rates for late payments and repayment of tax from HMRC.

Increases will apply to both the interest charged on late paid tax and the rate paid on repayments of tax. This will now also apply to VAT for amounts due relating to periods which begin on or after 1 January 2023.

The effective dates in which these rates will increase is 26 December 2022 for late quarterly instalment payments, and 6 January 2023 for late payment interest for other late payments.

Late payment interest has not previously been applied to the late payment of VAT returns. This will now apply for late payments and repayments of VAT for amounts due in relation to periods beginning on or after 1 January 2023, at the above rate.

HMRC state that late payment interest rates encourage prompt payment and ensures fairness for those who pay their tax on time.

Tax overpayments

The interest rate paid by HMRC on overpayment of tax is calculated as base rate minus one percent, which will increase to 2.5% from 6 January 2023.

Repayment interest is set at base rate minus one percent, and a lower limit of 0.5% (known as the ‘minimum floor’) applies.  HMRC state that this lower limit for repayment interest made sure taxpayers continued to get 0.5% when the base rate fell below this amount.

Repayment interest is paid at 0.5% up until the point that the Bank of England raises its base rate above 1.5%. From this point it increases as the base rate increases.

HMRC believe that the repayment interest rate compensates taxpayers fairly in instances when they overpay or pay early and for loss of use of their money.

HMRC late payment interest rates for other taxes

The interest rate for unpaid instalments of corporation tax liabilities is calculated by HMRC as base rate plus one percent (increasing to 4.5% from 26.12.2022).

Alexander & Co – expert advice for tax planning

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