Paying your tax late has always cost you something extra in interest. But the amount it costs has increased sharply in recent years, and many business owners and individuals who used to treat a late payment as a minor inconvenience are now finding it a considerably more expensive habit than it used to be.
HMRC’s late payment interest rate is directly tied to the Bank of England base rate, which rose significantly from 2022 onwards. The formula also changed from 6 April 2025, making late payment interest even more expensive than before. Even though the base rate has moved down from its peak, the interest HMRC charges on unpaid tax remains meaningfully higher than it was during the low-rate years of 2020 and 2021.
This article explains how the interest is calculated, which taxes it applies to, how it interacts with penalties, and what you can do to avoid it.
How HMRC Late Payment Interest Is Calculated
HMRC calculates late payment interest using a formula linked to the Bank of England base rate. From 6 April 2025, late payment interest for the main taxes is set at the Bank of England base rate plus 4 percentage points. Before that, it was generally base rate plus 2.5 percentage points.
The rate is adjusted when the Bank of England changes its base rate, usually shortly after the Monetary Policy Committee’s decision.
The interest accrues daily on the amount of tax outstanding from the day after the payment deadline until the date the payment is actually received by HMRC. It is not charged as a fixed lump sum at the end. Every additional day the tax remains unpaid adds a small further amount to what you owe.
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Here is a simple illustration of what this means in practice, using HMRC’s late payment interest rate of 7.75% as an example.
| Tax Unpaid | Interest Rate | 3 Months Late | 6 Months Late | 12 Months Late |
|---|---|---|---|---|
| £5,000 | 7.75% | £96.88 | £193.75 | £387.50 |
| £15,000 | 7.75% | £290.63 | £581.25 | £1,162.50 |
| £30,000 | 7.75% | £581.25 | £1,162.50 | £2,325.00 |
These figures are for illustration only. The actual rate you face depends on the Bank of England base rate at the time and should always be verified with your accountant or on the HMRC website.
Our post on late tax returns and penalties gives a broader overview of HMRC’s compliance charges, which is useful for understanding how interest sits alongside the penalty regime.
Why Late Payment Interest Has Increased So Significantly
To understand why this matters more now than it did a few years ago, it helps to look at where the Bank of England base rate has been.
| Period | Approximate Bank of England Base Rate | Approximate HMRC Late Payment Interest |
|---|---|---|
| 2020 to 2021 | 0.1% for much of the period | Around 2.6% under the old formula |
| Early 2022 | 0.5% and rising | Around 3.0% and rising under the old formula |
| 2023 to 2024 peak period | Up to 5.25% | Around 7.75% under the old formula |
| 2025 onwards | Falling from the peak, then 3.75% from December 2025 | 7.75% from January 2026 under the new formula |
At the 0.1% base rate that applied through much of 2020 and 2021, HMRC’s late payment interest rate was around 2.6% per annum. That was low enough that some businesses may have treated late payment as a relatively cheap source of short-term cash flow.
That calculation no longer holds. With late payment interest now based on the Bank of England base rate plus 4 percentage points, the cost of leaving a significant tax bill unpaid for even a few months is much higher. Even if the base rate moves down further, the rate remains considerably higher than during the post-financial-crisis decade of near-zero rates.
Our post on the autumn budget summary covers the broader fiscal and policy changes that have shaped the tax environment in recent years.
The Asymmetry Between What HMRC Charges and What It Pays
One of the features of HMRC’s interest system that consistently frustrates taxpayers is the gap between what HMRC charges on late payments and what it pays when it owes you money.
When HMRC owes you a repayment, for example because you have overpaid tax, it pays repayment interest at the Bank of England base rate minus 1 percentage point, subject to a minimum floor. When you owe HMRC money, it charges late payment interest at the Bank of England base rate plus 4 percentage points.
With a Bank of England base rate of 3.75%, HMRC charges late payment interest at 7.75% but pays repayment interest at 2.75%. This gap is built into HMRC’s rules and is not something you can negotiate. It is simply another reason to avoid building up late payment interest in the first place.
Which Taxes Does HMRC Charge Late Payment Interest On?
Late payment interest applies across many of the main UK taxes. The key ones that affect most small businesses and individuals are:
| Tax | Interest Starts From |
|---|---|
| Self-assessment income tax | 1 February, the day after the 31 January payment deadline |
| Capital Gains Tax through self-assessment | 1 February for gains reported through the annual return |
| UK residential property Capital Gains Tax | The day after the 60-day reporting and payment deadline |
| Corporation Tax | Day after the 9 months and 1 day payment deadline |
| VAT | Day after each VAT payment deadline |
| PAYE and National Insurance | Day after the 19th or 22nd monthly deadline, depending on payment method |
| Inheritance Tax | Usually 6 months after the end of the month of death |
For self-assessment, interest starts from 1 February regardless of when the tax return itself is filed. Filing your return late does not delay the point at which interest begins to run on any unpaid tax.
Our post on self-assessment tax returns covers the self-assessment payment schedule in full, including the payments on account system that catches many taxpayers by surprise. Our post on income tax rates in England, Wales and Northern Ireland provides useful context on the tax you are paying interest on.
For Corporation Tax specifically, there is no grace period. Interest runs from the day after the 9 months and 1 day deadline. Our post on corporation tax covers the payment schedule and how the liability is calculated. Our post on corporation tax mistakes covers the errors that most commonly lead to companies finding themselves with an unexpected unpaid liability.
For VAT, the late payment interest regime was updated from January 2023. Our post on MTD for VAT covers how the VAT compliance system now works, including payment obligations.
How Late Payment Interest Differs From Late Payment Penalties
Interest and penalties are two separate things, and it is important to understand the distinction because they can both apply at the same time.
Late payment interest is a daily charge for paying tax late. It accrues from the deadline and continues until you pay. It is not discretionary. HMRC applies it automatically to late payments regardless of your reason for being late.
Penalties are additional fixed or percentage charges that HMRC applies if payment is significantly overdue. For self-assessment income tax, a 5% penalty applies if the tax is still unpaid 30 days after the payment deadline, with further 5% penalties at 6 months and 12 months.
For VAT under the current regime, the first late payment penalty can apply where the payment is 16 days or more overdue. If payment is still outstanding at day 31, the first late payment penalty is calculated as 3% of what was outstanding at day 15 plus 3% of what is still outstanding at day 30. A second late payment penalty then accrues daily from day 31 at an annual rate of 10% on the outstanding amount.
The interaction of interest and penalties means that leaving a significant tax bill unpaid for an extended period results in a growing set of charges. A self-assessment bill of £20,000 left unpaid for 12 months could attract around £1,550 in interest at 7.75% plus 15% in late payment penalties, bringing the additional cost to more than £4,500 on top of the original tax bill.
Our post on personal tax gives a useful overview of the personal tax obligations that attract interest when they are paid late.
Self-Assessment: Payments on Account and the Interest Risk
One area where late payment interest catches people out is the payments on account system. If your previous year’s self-assessment tax bill was more than £1,000 and less than 80% of your tax was collected at source, HMRC usually requires you to make 2 advance payments on account towards the following year’s bill, due on 31 January and 31 July.
If you underpay your payments on account, or if you miss the July payment, interest runs from the due date just as it would for a balancing payment. Many self-employed people and landlords underestimate how much their income has grown during the year, underpay their payments on account, and then face a balancing payment in January plus interest on the shortfall.
Our post on self-assessment for sole traders covers the payment on account system in detail. Our post on tax returns for landlords is relevant for property income recipients who are often affected by the payments on account system.
Our post on capital taxes is relevant for those who have had capital gains in the year, as gains on assets other than UK residential property are usually reported and paid through self-assessment with the same 31 January deadline and the same interest rules.
Corporation Tax and the Large Company Quarterly Instalment System
For companies with annual taxable profits of up to £1.5 million, the Corporation Tax payment deadline is usually 9 months and 1 day after the accounting period ends. Interest runs from the day after that deadline if payment is not made.
For large companies with taxable profits above £1.5 million, the obligation is more demanding. They are generally required to pay Corporation Tax in quarterly instalments. For a 12-month accounting period, those instalments are usually due in the 7th, 10th, 13th and 16th months after the start of the accounting period.
Missing or underpaying any instalment can trigger interest from the relevant instalment date. This can mean interest running for a long time before the final position is settled.
The £1.5 million threshold can be reduced where a company has associated companies, and very large companies have different instalment rules. If your company is approaching the threshold, it is important to understand which payment regime applies and to plan accordingly.
Our post on limited company year-end accounts covers the broader context of company compliance and financial preparation.
VAT: Interest Under the Current Regime
Since January 2023, HMRC has applied a late payment interest model to VAT that works similarly to the interest regime for other taxes. Interest runs from the first day the payment is overdue until it is paid in full.
The VAT late payment penalty regime has also become more structured. There is no first late payment penalty if the VAT is paid in full or a Time to Pay arrangement is agreed within 15 days of the due date. From day 16 onwards, penalties can apply, and if VAT remains unpaid at day 31, a daily second penalty also starts to accrue.
Our post on how VAT registration affects your pricing gives useful context on the VAT compliance obligations that make timely payment important.
If your VAT returns and payments are managed through a professional, the risk of missing a payment deadline is significantly reduced. Our VAT returns service covers both the preparation and payment side of VAT compliance.
Time to Pay Arrangements: Does Interest Still Run?
If you cannot pay your tax bill in full by the deadline, HMRC operates a Time to Pay service that allows you to spread payments over an agreed period. However, a critical point that many people misunderstand is that agreeing a Time to Pay arrangement does not stop interest running on the outstanding amount.
Interest continues to accrue on the balance until it is fully paid, even when a Time to Pay arrangement is in place. The arrangement helps prevent the situation escalating into further enforcement action and can help avoid some late payment penalties if agreed early enough, which is its primary value. But the interest clock runs throughout.
This means that paying under a Time to Pay arrangement costs more overall than paying the full amount on time. The arrangement is absolutely the right move when you cannot pay in full, because it stops the situation getting worse. But it is not a free solution. Factoring in the ongoing interest cost is important when deciding how quickly to clear the balance.
Our post on cash flow forecasting for small businesses covers how to build tax liabilities into your financial planning so that cash is available when due and a Time to Pay arrangement becomes less likely to be needed. Our post on HMRC enquiries and how an accountant can support you is relevant if your payment difficulties have led to formal HMRC contact.
The Director’s Loan Account Connection
If your company has an overdrawn director’s loan account that is not repaid within 9 months and 1 day of the company’s year-end, the company can face a Section 455 charge on the outstanding balance.
For loans made between 6 April 2022 and 5 April 2026, the Section 455 rate is 33.75%. For loans made or benefits conferred on or after 6 April 2026, the rate is 35.75%. This charge is repayable once the loan is repaid or cleared, but in the meantime it represents a significant cash cost, and it attracts interest if the company does not pay it on time.
Our post on what is a director’s loan and how does it work explains the full tax treatment of director’s loan accounts and the consequences of leaving them unresolved.
How to Avoid Late Payment Interest
The most effective strategies for avoiding late payment interest are straightforward in principle, though they require discipline and planning in practice.
Setting money aside throughout the year is the most reliable approach. If you are self-employed or running a limited company, treating your estimated tax liability as a running commitment rather than a year-end surprise makes it far easier to have the funds available when the deadline arrives. Our post on monthly bookkeeping with an online accountant explains how regular bookkeeping gives you a running picture of your likely tax position.
Producing regular financial reports throughout the year helps you monitor your profitability and estimate your tax liability with reasonable accuracy several months before the deadline. This removes the uncertainty that leads some business owners to underprovide for tax and then face a shortfall at payment time.
Our post on what to do if your bookkeeping is behind is relevant if your records are not current enough to estimate your tax position reliably. And our post on MTD timelines and quarterly updates covers how the MTD regime brings more regular financial reporting into your routine, which has the useful side effect of giving you a much clearer picture of your tax exposure throughout the year.
Our post on MTD pitfalls and common mistakes covers the errors that lead to surprises at payment time, including misjudging income levels and failing to set aside enough for tax throughout the year.
How Asmat & Co Accountants Can Help
As experienced accountants in Slough with nearly 2 decades of working with businesses and individuals across the region, Asmat & Co Accountants make sure your tax liabilities are calculated accurately and your payment deadlines are clearly communicated well in advance of when they fall due.
For self-employed individuals and landlords, our self-assessment tax return service includes a clear breakdown of what you owe and when, so you can set aside the funds in time. For limited companies, our company accounts service ensures your Corporation Tax is calculated correctly and your payment deadline is tracked from the day your accounting year ends.
We manage VAT returns and payments for clients who want to make sure their VAT obligations are handled accurately and on time every quarter. Our bookkeeping service keeps your records current throughout the year, which makes estimating your tax position straightforward at any point.
Our small business accountants team supports clients across a range of sectors, and our accountants in Reading office provides the same comprehensive service across Berkshire.
If you are currently managing your own tax and finding that payment deadlines are being missed regularly, our post on what an accountant does for an SME gives a realistic picture of how professional support prevents exactly this kind of problem. Our post on the benefits of hiring an online accountant is worth reading if you are considering whether to engage a professional for the first time.
Our post on choosing the right accountant covers what to look for if you are evaluating your current arrangements. And our post on virtual CFO services and why they are in demand is relevant for business owners who want more strategic financial oversight, including tax planning, rather than just compliance support.
Frequently Asked Questions
Does HMRC charge interest on penalties as well as on unpaid tax?
HMRC charges interest on unpaid tax. Some penalties and penalty-related balances can also attract interest depending on the tax involved and the specific rules that apply. The key point is that interest on the original tax liability runs independently from any penalty charges.
Can I reduce or eliminate HMRC late payment interest by arguing financial hardship?
No. Interest is a statutory charge and HMRC has very limited discretion to remove it. A Time to Pay arrangement can prevent the situation escalating into further penalties and enforcement action, but it does not stop interest accruing. If you believe a penalty has been incorrectly applied, you may be able to appeal the penalty, but interest is not normally removed simply because payment was difficult.
If I overpay my tax, does HMRC pay me the same rate of interest that it charges?
No. HMRC pays repayment interest at the Bank of England base rate minus 1 percentage point, subject to a minimum floor. This is considerably lower than the rate it charges on late payments. This asymmetry is built into the legislation and applies across the main taxes where repayment interest is available.
Does interest continue to run if HMRC is investigating me?
Yes. An HMRC enquiry does not automatically suspend interest on tax that is due. If the investigation results in additional tax being assessed, interest can also be charged on that additional tax from the original payment deadline.
My accountant made an error that meant I paid too little tax. Am I still liable for the interest?
Yes. HMRC charges interest on the underpayment regardless of whose error caused it. You may have a separate complaint or claim against your accountant if their negligence caused the underpayment, but that is separate from your obligation to HMRC. This is one reason why professional indemnity insurance is important for accountants.
Is HMRC late payment interest tax-deductible?
It depends on the tax. Late payment interest on Corporation Tax is generally deductible for Corporation Tax purposes. However, interest on late-paid PAYE and National Insurance is not deductible. For individuals, late payment interest on personal tax is not deductible. Penalties are different from interest and are generally not tax-deductible.
What is the quickest way to stop interest running?
Pay the outstanding tax in full. The interest stops accruing on the amount paid when HMRC receives the payment. If you cannot pay in full, paying as much as possible immediately reduces the balance on which interest continues to run. Even a partial payment stops interest on the portion paid.
Does HMRC automatically calculate and add the interest to my account?
Yes. HMRC calculates interest automatically and adds it to your account. If you have paid the original tax but not the interest, the interest balance may remain on your account and need to be settled separately.
Pay on Time and Keep Every Pound You Have Earned
Late payment interest is one of the simplest costs in business to avoid, because it is largely within your control. The combination of knowing your deadlines, keeping accurate records throughout the year, and setting money aside as you earn it means you should not need to pay HMRC more than the tax itself.
Contact Asmat and Co today to make sure your tax position is managed proactively and your payment deadlines are never missed.
Need Help With Your Accounts Or Tax?
Whether you need support with self assessment, VAT returns, payroll, bookkeeping, CIS, company accounts or corporation tax, Asmat & Co Accountants can provide clear, practical advice for your business or personal finances.
