HMRC has decided to lower the interest rates applied to overdue tax payments following the recent reduction in the Bank of England’s base rate. The Bank of England has decreased its base rate from 4% to 3.75%, offering benefits to numerous borrowers and individuals with outstanding tax liabilities to HMRC.
For self-assessment taxpayers, HMRC imposes an interest rate of 8% on late tax payments, which will see a decrease to 7.75% effective January 9, 2026. Currently, late payment interest is calculated at the base rate plus 4%, while HMRC’s repayment interest for overpaid taxes or refunds is being adjusted to 3.5%.
Repayment interest aligns with the base rate minus 1%, with a floor of 0.5%. These modifications stem from the Bank of England’s decision to lower its base rate, impacting HMRC’s interest rates for late payments and repayments.
These adjustments come ahead of the impending deadline for self-assessment tax returns on January 31. Failure to file online by this date incurs an immediate £100 penalty, escalating to £10 per day up to a maximum of £900 if the return remains outstanding after three months. Subsequently, penalties increase to 5% of the tax owed or £300, whichever is higher, after six months and again after 12 months.
Late interest charges commence if tax payments are not settled by January 31, with additional fines of 5% of the unpaid tax after 30 days, repeating at six and 12 months. Individuals struggling to pay tax bills under £30,000 may explore setting up a payment plan with HMRC through the “Time to Pay” scheme.
Obligations to submit a self-assessment apply to self-employed individuals, those with supplementary income, landlords, high earners claiming Child Benefit, among others.
