HMRC is cutting down on the interest it imposes for delayed tax payments following a recent decrease in the Bank of England’s base rate. The Bank of England has reduced its base rate from 4% to 3.75%, benefiting numerous borrowers and individuals with outstanding debts to HMRC.
For self-assessment taxpayers, HMRC applies an 8% interest rate on overdue tax payments, which will be lowered to 7.75% starting January 9, 2026. Late payment interest is currently calculated at the base rate plus 4%, while repayment interest for tax overpayments is being reduced to 3.5%.
Repayment interest aligns with the base rate minus 1%, with a minimum threshold of 0.5%. The adjustments in interest rates are in response to the recent Bank of England base rate reduction, as confirmed on the HMRC website.
These modifications precede the upcoming deadline for self-assessment tax returns 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 greater, is applied, repeating at the 12-month mark.
To avoid late interest charges, tax payments must be settled by January 31. Delayed payments trigger an additional 5% fine after 30 days, with repeated penalties at the six-month and 12-month milestones. If facing difficulties in paying tax bills under £30,000, individuals can explore setting up a payment plan with HMRC through the Time to Pay scheme.
It is essential to complete a self-assessment if you are self-employed, have additional income sources beyond your primary employment, generate revenue from property rentals, or fall under the category of high earners receiving Child Benefit.