HMRC has decided to lower the interest rates on overdue tax payments following a 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 numerous borrowers and individuals with tax liabilities to HMRC.
For self-assessment taxpayers, HMRC imposes interest charges on late tax payments. Currently set at 8%, the interest rate on late payments will decrease to 7.75% effective January 9, 2026. Late payment interest is calculated as the base rate plus 4%, while repayment interest, when HMRC owes a refund, will drop to 3.5%. Repayment interest aligns with the base rate minus 1%, with a floor of 0.5%.
These adjustments come before the looming self-assessment tax return deadline on January 31. Failing to submit your tax return online by this date results in an immediate £100 penalty. Subsequently, fines escalate to £10 per day, up to £900 after three months, then increase to 5% of tax owed or £300, whichever is higher, after six months, and again after 12 months.
Late interest begins accruing if tax payments are not settled by January 31. Additional penalties of 5% of the outstanding tax are imposed after 30 days, repeated at six and 12 months. Individuals owing less than £30,000 in taxes can arrange a payment plan, known as Time to Pay, with HMRC if they are facing financial difficulties.
If you are self-employed, earn additional income beyond your primary employment, derive rental income, or are a high-income earner claiming Child Benefit, you may need to file a self-assessment tax return. Stay updated on valuable news by selecting Daily Mirror as a ‘Preferred Source’ on Google News.