Are you wondering how the recent Bank of England base rate cut affects your tax payments or repayments? The HMRC has officially updated its interest rates following a reduction in the base rate to 4.00%.
These changes impact late payment charges and repayment interest across various tax obligations. Understanding the latest updates can help you stay financially prepared and compliant.
Whether you’re a business owner, self-employed, or managing corporate taxes, this article explains everything you need to know about the new HMRC interest rates, including when they take effect and how they are calculated.
What Triggers HMRC to Adjust Interest Rates?
HMRC does not adjust its interest rates arbitrarily. Instead, the rates are directly linked to the Bank of England’s base rate, which is determined by the Monetary Policy Committee.
For example, on 7 August 2025, when the base rate was reduced from 4.25% to 4.00%, HMRC automatically updated its interest rates for both late payments and repayments.
This connection is established in legislation to ensure fairness for taxpayers and to encourage timely payment. Whenever the Bank of England changes the base rate, HMRC recalculates its interest rates accordingly. This mechanism allows the rates to remain aligned with wider economic conditions and fiscal policy objectives.
Key triggers include decisions by the Monetary Policy Committee, legislative rules linking HMRC rates to the base rate, and broader economic trends that shape monetary policy.
What Are the New HMRC Interest Rates for Late Payments and Repayments?
Following the base rate cut to 4.00%, HMRC has revised its interest rates to reflect the new economic conditions. For most taxes, the late payment interest rate is now 8%, while the repayment interest rate has been set at 3%.
These changes are designed to uphold the principle of fairness by charging more to those who delay their payments while offering reasonable compensation for those who overpay.
The 5% gap between the two rates aligns with standard commercial practice. It helps prevent late payments without overly penalising taxpayers.
The 8% late payment rate encourages timely settlements, and the 3% repayment rate ensures fairness without placing undue burden on government resources. These new rates will apply across various tax categories, including self-assessment, VAT, and PAYE.
When Will the New HMRC Interest Rates Come into Effect?
The new HMRC interest rates take effect in August 2025 but apply differently based on the type of instalment.
- For quarterly instalment payments, the new interest rates will apply from 18 August 2025.
- For non-quarterly instalment payments, the changes will begin on 27 August 2025.
This staggered implementation gives taxpayers time to adjust to the new rates. If your payment due date falls after these dates, the revised rates will be applied automatically to any late payments or overpayments.
It’s essential to check your payment schedule to see how the updates will impact your liabilities. Planning ahead could help you avoid additional charges.
How Do These HMRC Interest Rates Affect Corporation Tax Instalments?
The revised HMRC interest rates have specific implications for businesses making quarterly corporation tax instalments. These rates differ slightly from those applied to standard tax payments and repayments.
New Interest Rate on Underpayments: 6.5%
From 18 August 2025, interest on underpaid quarterly corporation tax will be charged at 6.5%. This lower rate compared to other taxes reflects the structured nature of instalment payments and the size of liabilities typically involved.
It serves as a balanced deterrent while considering the financial planning needs of corporations. If a company underpays an instalment, the 6.5% interest will begin accruing daily from the due date until the shortfall is cleared.
New Interest Rate on Overpayments: 3.75%
Corporations that overpay their tax instalments will now receive 3.75% interest on their surplus, effective from 18 August 2025. This repayment interest is slightly higher than the standard 3% to acknowledge the advance nature of these payments.
The difference supports businesses maintaining strong cash flow while ensuring HMRC compensates fairly for funds held longer than required.
How Are HMRC Interest Rates Legally Set and Calculated?
HMRC interest rates are governed by legislation and are not set arbitrarily. They are calculated based on the Bank of England’s base rate and follow a specific formula.
Here’s how the calculations work:
- Late Payment Interest = Base Rate + 4.00%
- Repayment Interest = Base Rate – 1.00%
- With a minimum floor of 0.5%
This structure ensures that rates are adjusted fairly and predictably in response to economic shifts. The base rate acts as the anchor, and the margins added or subtracted reflect HMRC’s policy to incentivise timely payment while compensating overpayments.
Additional notes:
- Rates are revised shortly after each base rate change
- Late payment interest starts accruing immediately after due dates
- Repayment interest begins from the date HMRC receives the excess payment
This legal framework ensures transparency and consistency across different types of tax liabilities.
Why Is There a Gap Between Late Payment and Repayment Interest Rates?
The difference between HMRC’s late payment and repayment interest rates is intentional and serves several purposes.
Primary reasons include:
- Encouraging Prompt Payment: Higher late payment interest discourages delays and helps HMRC collect taxes efficiently.
- Fair Compensation: Repayment interest is lower but designed to provide reasonable compensation to those who overpay or pay early.
- International Alignment: Many tax authorities use similar models, and HMRC’s approach compares favourably to commercial banking practices.
Typical commercial practice comparison:
Loans and overdrafts often have higher interest than savings and deposits, reflecting similar logic.
Current rate gap:
8% for late payments vs 3% for repayments. This structure supports fairness and operational efficiency while aligning with global financial norms.
What Types of Taxes Are Impacted by These Rate Changes?
The updated HMRC interest rates apply across a wide range of taxes affecting individuals, businesses, and corporations alike.
Whether you’re dealing with personal tax or running a company, these changes are likely to affect your obligations if payments are not made on time or if overpayments occur.
Taxes impacted include:
- Self-Assessment (personal income tax)
- Corporation Tax
- VAT (Value Added Tax)
- PAYE (Pay As You Earn)
- Capital Gains Tax
- Inheritance Tax
- Customs Duties
Each of these taxes is subject to the revised interest structure based on the new base rate. It’s important for taxpayers to review their obligations carefully and plan payments to avoid accruing interest under the new rates.
What Should Taxpayers Do to Avoid Late Payment Interest Charges?
With the late payment interest rate now at 8%, managing your tax payments efficiently is more important than ever. Even a short delay could result in noticeable interest costs.
Tips for avoiding late payment interest:
- Pay on Time: Always aim to meet HMRC deadlines to prevent automatic interest charges.
- Set Up Direct Debits: Automate your payments to avoid missing important dates.
- Use the Time to Pay Arrangement: HMRC offers this service to help those facing temporary financial hardship.
- Review and Plan Regularly: Check your accounts regularly and plan ahead for large payments.
- Consult a Professional: An accountant or tax adviser can help you structure payments efficiently.
Staying informed and proactive can help you avoid unnecessary costs and ensure compliance with the updated HMRC policies.
Conclusion
HMRC’s latest interest rate update, following the Bank of England’s base rate reduction, marks an important shift for taxpayers across the UK. With new rates now in effect for both late payments and repayments, understanding your obligations is crucial.
Businesses and individuals must pay close attention to the effective dates and ensure timely payments to avoid incurring additional charges. Staying informed and planning ahead will help taxpayers manage their finances effectively in this changing economic climate.
FAQs About HMRC Interest Rates Update
What formula does HMRC use to set interest rates?
HMRC uses the base rate set by the Bank of England, adding 4% for late payments and subtracting 1% for repayments, with a minimum repayment rate of 0.5%.
Will these interest rate changes apply retroactively?
No, the new rates only apply to payments due from the effective dates in August 2025 and will not affect past payments.
Are there separate rates for corporation tax instalments?
Yes, quarterly instalments of corporation tax are charged 6.5% for underpayments and 3.75% for overpayments.
Do HMRC interest rates apply to payment plans?
Yes, interest continues to accrue daily even if you’re on a Time to Pay plan with HMRC.
Can I reduce interest by making part payments?
Yes, since interest is calculated daily, partial payments can help reduce the amount of interest you owe.
Are there situations where interest is waived?
Interest is usually not waived, except in rare cases where HMRC has made an error or exceptional circumstances apply.
Where can businesses track future interest rate changes?
Future rate updates can be found through HMRC’s official announcements and financial news updates relevant to UK taxation.
