HMRC is lowering the interest rate applied to overdue tax payments following a recent reduction in the base rate by the Bank of England. The Bank of England has decreased its base rate from 4% to 3.75%, benefiting numerous borrowers and individuals with outstanding tax obligations to HMRC.
For self-assessment taxpayers, HMRC imposes interest charges 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 as the base rate plus 4%, while the repayment interest on tax overpayments or refunds is being reduced to 3.5%.
Repayment interest is determined as the base rate minus 1%, with a minimum threshold of 0.5%. These adjustments align with the Bank of England’s base rate reduction and are applicable to both late payment and repayment scenarios managed by HMRC.
As the deadline for self-assessment tax returns approaches on January 31, it is crucial to avoid penalties. Failing to file online by the deadline incurs an immediate £100 fine, escalating to £10 per day up to a maximum of £900 for further delays. Late payment interest starts accruing from January 31, with additional penalties of 5% of the outstanding tax after 30 days, repeating at six and twelve months.
Individuals struggling to settle tax bills under £30,000 can consider setting up a payment plan with HMRC through the “Time to Pay” scheme. It is essential to submit a self-assessment if self-employed, earning supplemental income, deriving revenue from property rentals, or claiming Child Benefit while being a high earner.
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