HMRC has decided to lower the interest rates for late tax payments following the recent reduction in the Bank of England’s base rate. With the Bank of England decreasing its base rate from 4% to 3.75%, this adjustment will benefit numerous borrowers and individuals who owe money to HMRC.
For self-assessment taxpayers, HMRC imposes interest charges on overdue tax payments. Presently set at 8%, the interest rate for late payments will be reduced to 7.75% starting January 9, 2026. Late payment interest is calculated at the base rate plus 4%, whereas the repayment interest paid by HMRC for overpaid taxes will be decreased to 3.5%.
Repayment interest is determined as the base rate minus 1%, with a minimum of 0.5%. The changes in interest rates are directly linked to the Bank of England’s base rate adjustments. These updates are implemented ahead of the looming self-assessment tax return deadline on January 31, where penalties are incurred for late filing and unpaid taxes.
Individuals failing to file their tax return online by the deadline face an initial £100 fine, which escalates to £10 per day up to £900 after three months. Subsequently, after six months, a penalty of 5% of the tax owed or £300, whichever is higher, is imposed, followed by additional penalties after 12 months. Late interest charges commence if taxes remain unpaid after January 31, with further fines accumulating after 30 days, six months, and 12 months.
In cases where tax payment struggles arise, individuals owing less than £30,000 may qualify for a Time to Pay arrangement with HMRC. Self-assessments must be submitted by self-employed individuals, those with supplementary income, landlords, high earners claiming Child Benefit, and others falling under specific criteria.
