With effect from 6 April 2025, HMRC has increased the interest rate for late tax payments to 8.5%. This rate is calculated as the Bank of England base rate plus 4%. Previously, the rate was set at base rate plus 2.5%.
This change applies to various taxes, including:
• Income Tax;
• National Insurance Contributions;
• Capital Gains Tax;
• Inheritance Tax;
• Stamp Duty Land Tax;
• Value Added Tax (VAT).
HMRC takes the view that the increased rate serves as a deterrent against late payments and encourages timely tax compliance.
This may be the case; however, for estates trying to sell property and unable to pay inheritance tax until they have done so, it is extremely costly.
The Repayment Interest Rate: Remains at 3.5%
For taxpayers who have overpaid tax, HMRC pays interest at a rate of 3.5%, effective from 25 February 2025. This rate is determined as the Bank of England base rate minus 1%, with a minimum floor of 0.5%.
Note that while the late payment interest rate has increased, the repayment interest rate remains unchanged.
Rationale Behind the Rate Adjustments
The disparity between the late payment and repayment interest rates is intentional. HMRC says it aims to:
• Encourage Prompt Payments: By imposing a higher interest rate on late payments, HMRC is seeking to incentivise taxpayers to meet their obligations on time.
• Maintain Fairness: HMRC says the lower repayment rate ensures that taxpayers are compensated for overpayments of tax without creating an incentive to overpay intentionally.
Implications for Taxpayers
• Timely Payments: Given the increased late payment interest rate, it’s more critical than ever to pay taxes on time to avoid additional charges. Executors of estates with inheritance tax liabilities that are being paid over time, and are subject to interest charges, may want to investigate other methods of financing.
• Overpayments: While overpaying taxes results in interest payments from HMRC, the rate is significantly lower than the cost of late payments, so strategic overpayments are not financially advantageous. Note however that interest received from HMRC on overpayments of tax is not itself taxable.
• Planning: Taxpayers should review their financial planning to ensure they can meet tax deadlines and avoid unnecessary interest charges.