HMRC has decided to lower the interest rate on overdue tax payments following the recent reduction in the Bank of England’s base rate. The Bank of England recently decreased its base rate from 4% to 3.75%, benefiting numerous borrowers and individuals with outstanding tax obligations to HMRC.
For self-assessment taxpayers, HMRC imposes an 8% interest rate on late tax payments, which will now be reduced to 7.75% starting January 9, 2026. Currently, late payment interest is calculated at the base rate plus 4%. Moreover, HMRC is decreasing the repayment interest rate to 3.5%, which is based on the base rate minus 1%, with a minimum of 0.5%.
The adjustments in interest rates by HMRC are directly tied to the changes in the Bank of England base rate. These modifications precede the approaching deadline for self-assessment tax returns on January 31. Failure to file taxes online by this date incurs an immediate £100 penalty, escalating to daily fines of £10 up to £900 after three months, and further increasing after six and twelve months.
Late interest charges commence after January 31 for any outstanding tax amounts. Furthermore, a 5% penalty of the unpaid tax is added after 30 days, with recurring fines at six and twelve months. Individuals facing difficulties in settling tax debts under £30,000 may qualify for a Time to Pay arrangement with HMRC.
Certain individuals, such as the self-employed, those with additional income sources, rental property owners, or high earners claiming Child Benefit, may be required to submit a self-assessment. These changes aim to streamline tax processes and provide relief to taxpayers amidst evolving economic conditions.