Insights

Although HMRC may be quite understanding when it comes to being a little bit late with tax payments, it is probably not in your best financial interests to miss their deadlines at the moment. Historically, being late would have attracted interest at a relatively low rate. In some instances, it may even have been beneficial to negotiate a payment schedule to preserve cashflow. Taxpayers might have considered it reasonable financial planning to pay tax liabilities over a period of time and suffer the interest charged; HMRC may have agreed provided the provisions to do so were agreed in advance.

The UK government charges a penalty of 2.5 percentage points above the Bank of England base rate for late payment of tax. Now that Bank of England base rates have risen significantly and bank lending rates have gone up accordingly, so too has the rate of interest charged by HMRC. It is currently set at 7.5%, up from 5.5% at the start of 2023. Depending on what happens with Bank of England base rates in the future it could rise further (or potentially decrease of course).

Which taxpayers could end up with higher interest payments?

When interest is charged for outstanding tax, it is based on the value of all monies due, so when the rates are high it can quickly accumulate. Taxpayers most likely to be impacted by the higher rates of interest are:

• Self-employed business owners and freelance workers, because they pre-pay tax in instalments twice a year, with one payment on account in July and the other to settle the calculated annual tax liability in January. The exceptions to this are taxpayers whose most recent tax bill was under £1,000 or who have already paid more than 80 per cent of the previous year’s tax owed;
• Landlords with other PAYE employment who are declaring additional rental income on their self assessment tax return;
• Company director shareholders who receive high dividend payments;
• Estates with an IHT (inheritance tax) liability relating to property and which is being paid in instalments. This interest accumulates quickly because interest is charged annually on all outstanding IHT, not just on the year’s instalment concerned;
• Taxpayers who have sold an investment property and capital gains tax (CGT) is due on the transaction, this amount is payable in full within 60 days of completion.

If you are concerned that you owe tax to HMRC and would like to discuss your circumstances to identify a possible solution, please contact us via partners@rjp.co.uk.

To learn more about probate and what your IHT liabilities are when someone dies, click here.

To learn more about CGT payable when you sell an investment property and the timescales for filing a return and paying tax, click here.