Seb Maley CEO of Qdos speaks his mind about the discrepancy between HMRC's late payment charges and refunds
HMRC reduces interest after Bank of England cut, but taxpayers still hit by 8% rate
The interest charged by HMRC on late tax payments has dropped by 0.25% in line with changes to the Bank of England (BOE) base rate, HMRC has confirmed. However, taxpayers will still be hit with an 8% interest charge on outstanding tax bills, such as late self-assessment payments or those agreed on a payment plan with HMRC.
The latest changes came into effect on 18th August for quarterly instalment payments, with the new rate applying from 27th August for non-quarterly instalment payments. When calculating interest, HMRC factors in the base rate (4% following the BOE’s move to reduce it from 4.25%) plus 4%.
However, when it comes to the interest HMRC pays on tax refunds, this amounts to the base rate minus 1%. It means HMRC charges more than double the interest it pays out. The tax office states:
The rate of late payment interest encourages prompt payment and ensures fairness for those who pay their tax on time, while the rate of repayment interest fairly compensates taxpayers for loss of use of their money when they overpay.
Maley: There’s a bigger story here
Seb Maley, CEO of tax insurance firm Qdos, said the mantra “Every little help springs to mind.”
He continued, “In simple terms, if you’re late paying a tax bill, you’ll be charged less interest than in previous months. It’s a step in the right direction for many self-assessment taxpayers – whether freelancers, business owners or those with side hustles – who have struggled to make ends meet in recent years.”
But let’s not get too ahead of ourselves. And really, the bigger story is that HMRC charges twice as much interest as it pays out to taxpayers, in the form of refunds and rebates. This, in my opinion, is completely illogical.
Along with the issue of being hit by 8% interest on late tax payments, late self-assessment taxpayers run the risk of being investigated by HMRC.
-Seb Maley, CEO Qdos
Maley warned, “Outstanding debts to HMRC and the late filing of returns are one of the many red flags that could lead the tax office to scrutinise your compliance – so it goes without saying, along with the cost of settling up with HMRC late, the sooner you’re able to pay, the better in every sense.”
The latest shift in interest rates means a person who was already paying late charges for overdue tax will see their late interest rate fees go down based on the new information.
HMRC’s late payment interest rate is calculated as the Bank of England (BOE) base rate plus 4%. With the BOE’s base rate decreasing from 4.25% to 4%, HMRC’s late payment interest rate has also dropped from 8.25% to 8.00%. This new, lower rate applies to any outstanding tax bills from the effective dates mentioned in the text (August 18th for quarterly payments and August 27th for non-quarterly payments).
Here’s an example calculation
Let’s illustrate with an example for a self-assessment taxpayer who owes £5,000 and was being charged the old, higher rate.
Imagine a taxpayer, let’s call him Joe, had an overdue tax bill of £5,000. The payment was due on January 31st, but Joe couldn’t pay it. As of August 1st, he had accumulated several months of interest at the old rate.
- Old Rate: The old Bank of England base rate was 4.25%.
- Old HMRC Interest Rate: 4.25% (BOE rate) + 4% = 8.25%
Now, the new rate comes into effect.
- New Rate: The new Bank of England base rate is 4%.
- New HMRC Interest Rate: 4% (BOE rate) + 4% = 8%
This means that for the interest accrued from August 27th onwards, the daily interest on Joe’s £5,000 debt will be calculated using the new, lower 8% rate. The interest accrued before August 27th will remain at the higher 8.25% rate.
Here is the daily interest calculation:
Daily Interest at Old Rate (8.25%):
(£5,000 x 0.0825) / 365 days = £1.13 daily
Daily Interest at New Rate (8%):
(£5,000 x 0.08) / 365 days = £1.10 daily
Even though the drop seems small, it will lead to a gradual reduction in the total amount of interest charged. While Joe’s total debt from penalties and interest won’t go down, the interest portion will accumulate at a slower rate from the date the new rate became effective.
This rate reduction, while welcome, highlights the significant cost of late tax payments. The late payment interest rate is still more than double the rate HMRC pays on tax refunds, which is the BOE base rate minus 1% (4% – 1% = 3%). This 5% difference is why Seb Maley points out that HMRC charges twice as much interest as it pays.
