Paying your tax late? Be prepared for higher interest
Late taxpayers will be facing higher interest rates from this week following the rise in the Bank of England base rate. HMRC’s interest rates for late payment are linked to the base rate that was increased to 1.75% from 1.25% earlier this month.
When do the tax changes come into effect?
The changes will come into effect on:
- 15 August 2022 for quarterly instalment payments
- 23 August 2022 for non-quarterly instalments payments
The repayment interest rate will also increase.
How HMRC interest rates are set
HMRC interest rates are set in legislation and are linked to the Bank of England base rate.
Late payment interest is set at base rate plus 2.5%. Repayment interest is set at base rate minus 1%, with a lower limit – or ‘minimum floor’ – of 0.5%.
The minimum floor ensured that taxpayers continued to receive 0.5% repayment interest even when base rate fell to 0.1%.
The differential between late payment interest and repayment interest is in line with the policy of other tax authorities worldwide and compares favourably with commercial practice for interest charged on loans or overdrafts and interest paid on deposits.
The rate of late payment interest encourages prompt payment and ensures fairness for those who pay their tax on time, while the rate of repayment interest fairly compensates taxpayers for loss of use of their money when they overpay or pay early.
Do you need advice on your tax matters? Get in touch today.
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