Her Majesty’s Revenue & Customs have confirmed that the interest rate for late payments will increase to its highest level in 13 years, encouraging people to visit their tax accountant as soon as possible to avoid late payments or filing.
After announcing that an increase could occur in the wake of the Bank of England base rate increase to 1.75 per cent, HMRC has since confirmed that as of 23rd August, late tax bills will be charged at an interest rate of 4.25 per cent.
This interest rate hike also covers non-quarterly instalment payments of Corporation Tax, Capital Gains Tax, Stamp Duty and National Insurance.
Conversely, the repayment supplement, a compensation payment paid if HMRC does not issue a payment instruction, increased from 0.25 per cent to 0.75, the first hike in over a decade but still far lower than the repayment rate people who owe taxes pay to HMRC for late payments.
What Is Late Payment Interest?
If you either file your taxes late or pay them after the scheduled deadline (typically 31st January), you are likely to receive a fine unless there was a very good reason that your filing was late.
For late filing, there is a base fine of £100 plus £10 for every additional day your taxes are late, with an overall cap of £1000 for the first three months.
Later than that, and the fine increases to £1000 plus the higher of £300 or five per cent of the overall taxes due. For taxes that are a year late, the whole tax amount can be charged as a fine.
If the payment is late, you are charged interest every day from the date the payment was due at a rate of 4.25 per cent as of 23rd August 2022, as well as being charged a penalty of five per cent of the outstanding tax amount after a month, which increases to ten per cent after six months and 15 per cent after 12.
This can be more easily seen with an example. If you owed £5,000 when the clock strikes midnight on 1st February, you would owe 4.25 per cent interest, or around 58p.
Fast forward three months and it would be £250 plus £52.40 in interest, and by the end of the year that amount would have increased to £750 in charges plus £210 in interest.
Could This Increase Further?
According to HMRC themselves, they calculate their late payment interest rate based on the base rate plus 2.5 per cent, so if the base rate increases again, with a 2.5 per cent rate having been predicted by some financial experts, this interest charge could similarly increase to five per cent.
This, alongside the huge increase in energy costs, the price of everyday essentials and mortgage rates has culminated in a cost of living crisis that for people already behind on their tax bills could lead to further issues.
People who have outstanding tax liabilities may need to settle as much as they can afford to, either by paying it off or setting up a payment plan with HMRC before rates increase further.