HMRC is reducing the interest imposed on overdue tax payments following the recent reduction in the Bank of England’s base rate. The Bank of England has decreased its base rate from 4% to 3.75%, benefiting many borrowers and individuals with tax liabilities to HMRC.
For self-assessment taxpayers, HMRC applies an interest rate of 8% on late tax payments, which will be lowered to 7.75% starting January 9, 2026. Currently, late payment interest is calculated at the base rate plus 4%, while HMRC’s repayment interest on overpaid taxes is being reduced to 3.5%.
Repayment interest is determined as the base rate minus 1%, with a minimum limit of 0.5%. The adjustment in interest rates aligns with the Bank of England’s base rate reduction, as confirmed by an announcement on the HMRC website.
These changes precede the upcoming deadline for self-assessment tax returns on January 31. Failure to submit your tax return online by this date 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, repeating at the 12-month mark.
It is essential to settle any outstanding tax by January 31 to avoid accruing late interest. Additional penalties of 5% of the unpaid tax are applied after 30 days, and this penalty recurs at the six-month and 12-month intervals.
Individuals with tax bills under £30,000 experiencing difficulty in payment may qualify for a payment arrangement with HMRC through the Time to Pay scheme. Self-assessment is mandatory for self-employed individuals, those with supplementary income sources, landlords, and high-income earners claiming Child Benefit.
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