New HMRC Interest Rates Explained

HMRC has announced changes to interest rates for tax payments this April, i.e., April 2025. These significant changes to the interest rate regime have tightened the financial consequences of late tax payments. Previously, the late payment interest rate was calculated by the Bank of England (BoE) at a base rate plus 2.5%. Now it has been increased to base rate plus 4%. Due to this, the effective interest rate to 8.5% when the BoE base is 4.5%. This is among the highest rates in more than ten years. It marks a more aggressive stance of the HMRC on compliance. HMRC interest rate changes are going to impact businesses as well as individuals significantly. This blog contains everything that you need to know about it.       

What Are HMRC Interest Rates and Why Do They Change?

HMRC charges interest on unpaid and or overdue taxes. The purpose of these interest rates is to encourage you to pay taxes on time. They also make things fair for everyone who does. Here are the three main types of interest rates that you need to know about:

1. Late-Payment Interest

If you don’t pay your tax bill on time, this is the extra cost you have to pay. This interest is charged by the HMRC from the day after your payment was due. It continues until the day it’s paid in full. Late payment interest discourages late payments. It also covers the extra time HMRC had to wait for your payment. 

2. Repayment Interest

This is what HMRC pays you when they owe you money. For instance, you paid much more tax than you were supposed to, or you were due a refund you didn’t get. This interest is usually less than late-payment interest. It is supposed to be fair, but it stops people from using HMRC as a savings account. 

3. Corporation Tax Instalment Interest

Corporation Tax is often paid by large companies in advance in the form of instalments. If HMRC does not get these instalments on time, they charge interest. This is just like the main late-payment rate. The rate, however, is slightly lower than that, though it still adds up. 

How Are These Rates Set?

The base rate of the Bank of England (BoE) is the basis for all HMRC interest rates. This is the primary interest rate in the UK, and it fluctuates according to the state of the overall economy. HMRC uses the following fixed formulae: 

• Late-payment interest = BoE base rate + 4% (as of April 2025)
• Repayment interest = BoE base rate – 1% (with a minimum of 0.5%)
• Corporation Tax instalment interest = BoE base rate + 2.5%

As the BoE rates change, HMRC updates itself as well. It is done within a few weeks. 

Why Do HMRC Interest Rates Change?

The change in interest rates serves a few purposes; it is not done randomly. They are meant to discourage late payments. Since they make it more expensive to delay, taxpayers are more likely to pay on time. Secondly, the interest helps preserve the value of the money. This is done by keeping the amount owed to HMRC from depreciating due to inflation. The system is also built to promote fairness and discipline. It makes sure that people who are paying on time do not get penalised, while those who delay their payments get penalties. 

HMRC Interest Rate Changes Effective from 6 April 2025

HMRC made significant adjustments to its interest charging and payment procedures in April 2025. Here is everything you need to know about these changes. 

1. Late Payment Interest Rate

The formula used to calculate the late payment interest rate has been adjusted. It is the Bank of England base rate plus 4%. So what does this mean? Well, in simple words, now small delays can be costly for you. The late payment rate, for instance, increased to 8.5% while the base rate was 4.5%. The interest rate on late payments was adjusted to 8.25% in May 2025, following a minor decline in the base rate to 4.25%. These changes are applied to the following taxes: 

• Income Tax
• Capital Gains Tax
• National Insurance
• PAYE
• VAT
• Corporation Tax (non-instalment)
• Outstanding penalties

Interest on late payments is calculated daily. It keeps accumulating until the debt is paid off, putting further strain on finances every day.

2. Repayment Interest Rate

There has been no change in the rate that HMRC pays when it owes you money,  such as for overpaid tax. It remains tied to the base rate but calculated as the BoE rate minus 1%, with a minimum of 0.5%. This means taxpayers are receiving 3.5% interest when the base rate is 4.5%. When it drops to 4.25%, you will get 3.25%. Depending on which party owes money, there is a growing disparity in how interest is handled. This is evidenced by the unchanged repayment rate and the higher rate applied to late payments. 

3. Corporation Tax Instalment Interest

For larger companies paying Corporation Tax in quarterly instalments, the interest charged on late payments has risen from base rate plus 1% to base rate plus 2.5%. At a base rate of 4.5%, this means a 7% interest rate on missed instalments. This applies to businesses with taxable profits typically over £1.5 million. This is because these businesses are required to follow the quarterly instalment regime. Any delay in scheduled payments now carries a noticeably heavier cost.

How Much Could HMRC Interest Rate Changes Actually Cost You?

 Currently, even a small payment delay might result in observable additional expenses. Let’s examine a simple example to give you a general notion. The interest payable at an annual rate of 8.5% on a £10,000 tax debt would be approximately £210 if the payment were made 90 days after the due date. This continues for three months, and it is only for one bill. As delays become longer or amounts become larger, the amount increases. The average interest rate for late payments was closer to 6.75% last year. Accordingly, interest on the same £10,000 that was 90 days past due would have been roughly £165. Here are rounded estimates using simple interest. Actual amounts may vary, subject to compounding, exact timing, and HMRC calculations.