If you owe tax to HMRC or if you are owed a tax rebate, interest is payable on the amount. The interest rates have undergone significant changes in recent years, primarily influenced by adjustments to the Bank of England’s base rate. As a result of inflation and the increases to the base rate, the rate of interest has risen. This impacts both late payment interest rates and repayment interest rates, affecting taxpayers who either owe or are owed money by HMRC.
How are HMRC interest rates set?
HMRC interest rates are automatically linked to the Bank of England base rate and are set in legislation. There are two main rates:
1. Late Payment Interest Rate – set at the base rate plus 2.5%; and
2. Repayment Interest Rate – set at the base rate minus 1%, with a lower limit of 0.5% (known as the ‘minimum floor’).
The late payment interest rate encourages prompt payment and ensures fairness for those who pay their tax on time.
The repayment interest rate compensates taxpayers when they overpay HMRC and it purportedly covers them for loss of use of their money, although the rate of interest is minimal.
Recent changes to interest rates
Bank of England rates had been increasing but were recently lowered, which directly impacts HMRC’s interest rates. Here’s how the rates changed most recently:
February 2025 – The Bank of England reduced the base rate to 4.5% from 4.75%. This meant HMRC’s late payment interest rate was adjusted to 7% and the repayment interest rate was adjusted to 3.50%.
The current late payment interest rate is set at 7% from 25 February 2025. This rate is calculated based on the Bank of England base rate of 4.5%, plus 2.5%.
Worked example – how much interest will I pay HMRC?
For example, if a taxpayer owes £10,000 in outstanding tax, the interest charged will be calculated as follows:
Outstanding Tax Amount: £10,000
Annual Interest Rate: 7%
Daily Interest Rate: 7% / 365 = 0.01918%
If the taxpayer’s outstanding tax remains unpaid for 30 days, the interest would be payable as follows:
Interest for 30 Days: £10,000 x 0.01918% x 30 = £57.54
Interest will continue to accrue daily until all the outstanding tax is paid in full. To avoid additional interest charges, taxpayers should try and settle unpaid tax liabilities as quickly as possible.
As the Bank of England continues to adjust the base rate in response to economic conditions, HMRC’s interest rates will also change accordingly.