HMRC has decided to lower the interest rates on overdue tax payments following the recent reduction in the Bank of England’s base rate. The Bank of England has cut its base rate from 4% to 3.75%, benefiting numerous borrowers and individuals with outstanding tax liabilities to HMRC.
For self-assessment taxpayers, HMRC currently imposes an 8% interest rate on late payments, which will decrease to 7.75% starting January 9, 2026. Late payment interest is calculated at the base rate plus 4%, while the interest paid by HMRC on overpaid taxes or repayments will be reduced to 3.5%.
Repayment interest is determined by the base rate minus 1%, with a minimum limit of 0.5%. These adjustments are in line with the Bank of England’s base rate modifications. It is essential to note that these changes precede the upcoming deadline for self-assessment tax returns on January 31.
Failure to submit your tax return online by this deadline incurs an immediate £100 penalty, escalating to £10 per day up to a maximum of £900 after three months. Subsequently, after six months, a penalty of 5% of the tax owed or £300, whichever is higher, is imposed, and this cycle repeats after 12 months.
Late interest charges commence if taxes are not paid by January 31, leading to an additional 5% fine on the outstanding tax after 30 days, with recurring penalties at six months and 12 months. Individuals facing challenges in settling their tax dues and owing less than £30,000 may qualify for a Time to Pay arrangement with HMRC.
Self-assessment may be necessary for self-employed individuals, those with supplementary income sources, landlords, or high-income earners claiming Child Benefit. These actions are crucial to ensure compliance and avoid penalties.