Do you have a tax debt? Read our guide to late payment interest
HMRC interest rates are linked to the Bank of England base rate. Over the last year, the interest rate for late payment of tax has more than doubled and, at the time of writing, is at 6% per year – the highest it has been since December 2008. If you have a tax debt, late payment interest may now be a much bigger consideration when thinking about how much you owe to HMRC.
If tax is paid late, HMRC will charge interest. The interest rate is calculated as Bank Base Rate plus 2.5%. At the time of writing, the HMRC rate is 6%. From 21st February, this will go up to 6.5%. As set out in our guidance, HMRC do not have any discretion over whether to charge interest, and how much, even in exceptional circumstances.
It is important that anyone who already has a tax debt, or who is considering entering into a Time to Pay arrangement with HMRC, understands the impact that late payment interest may have on the overall amount owed. The interest may be high, or at least higher than you were expecting, and it may now be a more significant consideration, although HMRC’s rates may be lower than other creditors.
Example
Simon completes his 2021/22 tax return tax return on 30 January 2023 and finds he has an unexpected tax liability of £1,500 for the High Income Child Benefit Charge that he can’t afford to pay immediately.
On 1 February 2023, Simon arranges an online Time to Pay arrangement with HMRC to pay his tax bill in four monthly instalments of £375 on the last day of each month, beginning on 28 February 2023. Interest runs from the due date of 31 January 2023 to the dates of payment. Working to the nearest day, the interest (assuming a rate of 6.00%) that Simon will have to pay is calculated as follows:
| Amount Outstanding | From | To | Days | Interest |
|---|---|---|---|---|
| 1500 | 01/02/2023 | 28/02/2023 | 28 | £6.90 |
| 1125 | 01/03/2023 | 31/03/2023 | 31 | £5.73 |
| 750 | 01/04/2023 | 30/04/2023 | 30 | £3.69 |
| 375 | 01/05/2023 | 31/05/2023 | 31 | £1.91 |
| £18.23 |
Simon will have to pay £18.23 interest. This is around double what he would have paid last year but much less than if he had arranged to pay the £1,500 over 12 months (it would be nearly £50). By arranging the Time to Pay before 3 March 2023, Simon will avoid a late payment penalty.
HMRC say in their detailed guidance on Time to Pay arrangements, the interest payable will be included in overall debt covered by the arrangement.
Who needs to consider late payment interest?
As well as people with straightforward income tax debt scenarios, for example, those with a Self Assessment debt, other people might need to consider the increased cost of late payment interest. For example:
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If you are in Self Assessment and reduce your payments on account excessively (see below),
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If you are an employer who owes income tax under PAYE,
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If you are in dispute with HMRC over an amount or have an open enquiry or assessment,
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If you have complex debts (for example, loan charge issues where it is taking a long time to establish the amount of tax due, or are making a disclosure to HMRC for historic undeclared liabilities),
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If you owe penalties - if you do not pay penalties by the due date, which is 30 days from the date they are issued, HMRC can charge interest on them,
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If you owe other types of tax, for example, National Insurance contributions, capital gains tax or stamp duty, SDLT and stamp duty reserve tax.
Interest does not run when HMRC ‘code out’ tax debts. Code out means that HMRC change your tax code to collect any debt owed. However, you needed to have filed your 2021/22 tax return by 30 December 2022 to have any 2021/22 Self Assessment underpayments coded out. If you are thinking about asking to pay a debt through a Time to Pay arrangement rather than through your tax code, then you should be aware that interest will apply, as set out above.
What if HMRC’s actions are contributing to the amount of interest accruing?
HMRC say they can’t reduce or waive the interest where their actions (or inactions) have contributed to the overall amount of interest payable. However, if you are out of pocket as a result of HMRC’s actions, you may consider making a formal complaint, which can sometimes result in a compensation payment.
You can find more information in our guidance.
In addition, it is worth being aware that while HMRC have no specific power to mitigate interest, they do have some discretion under their general “collection and management” powers. Authority is delegated to the specialist Interest Review Unit, to make decisions on exercising discretion over payment of interest where an objection is raised.
Other things to consider if you have a 2021/22 Self Assessment tax debt that you can’t pay
The payment that was due on 31 January 2023, may have included a payment on account for the 2022/23 tax year. However, you can request to reduce these payments on account if you expect to pay less tax for the 2022/23 tax year. But be careful not to reduce them excessively.
Once you are clear on how much tax you owe, we set out information about things you can do if you can’t pay your tax bill in our guidance. For example, we cover setting up a Time to Pay arrangement in some detail.
If you don’t think that clearing the debt with HMRC is likely to be an option, no matter how long you are given, TaxAid have a guide that will help you understand your options.
If you are in serious debt and feel overwhelmed or at crisis point, we recommend you consider taking further advice from a debt specialist, such as Citizens Advice, StepChange or Business Debt Line. In some cases, debt advisers can help you access a scheme called breathing space. This scheme covers HMRC debts and can provide legal protection from creditor action for 60 days, to relieve pressure and to give you a chance to consider other debt solution options with a debt specialist.