HMRC Interest Rate Increase – How does it impact you?

The late payment interest rate charged by HMRC will be increasing from 2.5% to 4% above the Bank of England base rate from 6 April 2025. Using the current interest rate set by Bank of England of 4.75%, this would mean a staggering 8.75% interest rate on late paid tax.

For many businesses and individuals, the cost of delaying tax payments has historically been relatively low. With interest rates on tax debts often lower than commercial borrowing, some have viewed it as a low-cost option to manage cash flow. However, recent changes to HMRC interest rates are set to change this dynamic.

What are the new HMRC rates?

From 6 April 2025, the interest rate on late tax payments will increase to the Bank of England base rate plus 4% (up from 2.5%).

Let’s put this into real world figures using current Bank of England base rate of 4.75%. Add the 4% surcharge and this totals an interest rate of 8.75%.  Equivalent to 0.024% per day on any outstanding tax.

For example, a £100,000 tax bill unpaid from 31^st January 2025 would accrue interest at a rate of £19.86 per day under current rules, but this will increase to £23.97 per day from 6 April 2025.

How will the new HMRC interest rates on late tax payments impact you?

While this move may seem harsh, it’s intended to deter strategic tax deferral and encourage timely payments. However, it could have a significant impact on those facing financial difficulties, as many businesses are during this current climate. For those unable to pay on time, the higher interest rates will only exacerbate their financial problems and push them further into debt.

To summarise, the change in HMRC late payment interest rates has several implications:

• Increase cost of delay – The higher interest rate makes delaying tax payments significantly more expensive. This will encourage businesses to prioritise tax obligations.
• Reduced incentive to strategic delay – Some businesses use tax deferral as a form of financing, as it has historically been much cheaper than borrowing.
• Potential cash flow strain – For those already struggling with cash flow, the higher interest charges could exacerbate financial difficulties.

What can you do?

HMRC offers Time to Pay arrangements to help taxpayers manage their tax debts through instalments. Contact HMRC as soon as possible to discuss your situation and explore potential Time To Pay arrangements. However, it is important to note the interest on these arrangements often extends over the full term, even if the debt is repaid early. With the new, higher interest rates, this option may become less attractive to some taxpayers, however it is still a useful route to avoid additional penalties and surcharges where a plan is agreed