HMRC is decreasing the interest it imposes on overdue tax payments following the recent reduction in the Bank of England’s base rate.
The Bank of England has just lowered its base rate from 4% to 3.75%, benefiting numerous borrowers and individuals with outstanding tax obligations to HMRC.
For self-assessment taxpayers, HMRC levies interest on late tax payments. Currently set at 8%, the interest rate on overdue payments will decrease to 7.75% starting January 9, 2026.
Late payment interest is calculated at the base rate plus 4%. Additionally, HMRC is reducing the repayment interest to 3.5% for individuals who have overpaid their taxes or are entitled to a refund.
Repayment interest is determined by the base rate minus 1%, with a minimum threshold of 0.5%.
In response to the Bank of England’s base rate adjustment to 3.75% from 4.00%, HMRC stated that the interest rates for late payments and repayments would be lowered accordingly.
These modifications precede the deadline for self-assessment tax returns on January 31. Failure to submit your tax return online by this date incurs an immediate £100 penalty.
The penalty escalates to £10 per day, up to a maximum of £900, for returns not filed after three months. After six months, a charge of 5% of the tax owed or £300, whichever is greater, is applied, repeating after 12 months.
Late interest begins to accrue if the tax owed is not paid by January 31. An additional 5% of the unpaid tax is levied after 30 days, with recurring penalties at six months and 12 months.
Individuals owing less than £30,000 in taxes can potentially arrange a payment plan, known as Time to Pay, with HMRC if they are struggling to settle their tax bill.
A self-assessment submission may be necessary for self-employed individuals, those earning supplementary income, landlords, high earners claiming Child Benefit, and others in specific financial situations.