HMRC has decided to lower the interest rates applied to overdue tax payments following the recent reduction of the Bank of England’s base rate. The Bank of England recently cut its base rate from 4% to 3.75%, benefitting numerous borrowers and individuals with outstanding tax liabilities to HMRC.

For self-assessment taxpayers, HMRC imposes interest charges on late tax payments. The current interest rate on late payments stands at 8%, but it will decrease to 7.75% starting January 9, 2026. Late payment interest is calculated as the base rate plus 4%, while the repayment interest for overpaid taxes or refunds is being reduced to 3.5%.

Repayment interest is determined by the base rate minus 1%, with a minimum threshold of 0.5%. These adjustments align with the Bank of England’s base rate reduction, as announced by the Monetary Policy Committee. The changes are effective before the looming January 31 deadline for self-assessment tax returns.

Failing to submit tax returns online by the deadline incurs an immediate £100 penalty, escalating to £10 per day up to £900 after three months of delay. Subsequently, a 5% charge of the tax owed or £300, whichever is higher, applies after six months and again after twelve months. Late interest charges commence on outstanding tax amounts after January 31, leading to additional penalties after 30 days, six months, and twelve months.

Individuals struggling to settle tax bills under £30,000 can explore setting up a Time to Pay arrangement with HMRC for manageable payment options. Self-assessment obligations apply to self-employed individuals, those with supplemental income, landlords, high-income earners claiming Child Benefit, and others in specific financial situations.

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