HMRC has decided to lower the interest rates imposed on overdue tax payments following a recent reduction in the base rate by the Bank of England. The Bank of England recently decreased its base rate from 4% to 3.75%, benefitting numerous borrowers and individuals with outstanding tax payments.
For self-assessment taxpayers, HMRC currently applies an interest rate of 8% on late tax payments, which will decrease to 7.75% starting January 9, 2026. Late payment interest is calculated at the base rate plus 4%, while the interest paid by HMRC on overpaid tax or refunds is being reduced to 3.5%.
Furthermore, repayment interest is set at the base rate minus 1%, with a minimum limit of 0.5%. These adjustments are in accordance with the changes in the Bank of England base rate, as confirmed on the HMRC website.
The revised rates are timely, considering the upcoming self-assessment tax return deadline on January 31. Failure to submit your tax return online by this date incurs an immediate £100 penalty, escalating to £10 per day up to a maximum of £900 after three months. Subsequently, after six months, a fine of 5% of the tax owed or £300 (whichever is higher) is imposed, with a repeat after 12 months.
It is crucial to settle any tax obligations by January 31 to avoid accruing late interest. Delayed payments will result in additional penalties, including a 5% charge on the outstanding tax after 30 days, with recurring fines at six months and 12 months.
Individuals facing difficulties in paying tax bills below £30,000 can explore setting up a payment plan, known as “Time to Pay,” with HMRC. Additionally, certain individuals, such as the self-employed, those with extra income sources, property renters, high earners claiming Child Benefit, must submit a self-assessment.
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