As first announced in the autumn budget 2024, HMRC will increase the interest rate charged on late payment of most taxes and duties from 7% to 8.5%, starting 6 April 2025. This change reflects a wider government initiative aimed at reducing the UK’s overall tax debt.

Currently, interest is charged at the Bank of England (BoE) base rate plus 2.5 percentage points. From 6 April 2025, this will rise to BoE base rate plus 4 percentage points. Based on the current base rate, this takes the late payment interest rate from 7% (as of 25 February 2025) to 8.5%.

The BoE base rate is scheduled to be reviewed next on 8 May 2025.

Different rates for specific taxes

Certain taxes are subject to lower rates of late payment interest, but these too will increase:

• Corporation tax quarterly instalment payments (QIPs):
  
  • Currently: BoE base rate +1%
     
  • From 6 April 2025: BoE base rate +2.5%
     
• Customs duty:
  
  • Currently: BoE base rate +2%
     
  • From 6 April 2025: BoE base rate +3.5%
     

There are no changes to the rates of interest HMRC pays on overpaid tax. From 25 February 2025, the repayment interest rate remains at 3.5% for most taxes and duties.

Late payment penalties also rising

At the spring statement on 26 March 2025, the government confirmed that late-payment penalties will increase from April 2025 for:

• VAT; and
   
• Income tax under Making Tax Digital (MTD), from the tax year in which the taxpayer signs up to MTD.
   

This means that from April 2025, a business that underpays VAT could face:

• Interest at 8.5%
   
• Daily penalties at an annualised rate of 10%
   

That penalty may be avoided if a time to pay arrangement is agreed with HMRC in advance.

What this means for businesses and individuals

This increase signals HMRC’s firmer stance on late payment. The combination of higher interest and stricter penalties makes it essential for taxpayers to stay on top of their liabilities.

If you or your business needs advice on cash flow, time to pay arrangements, or how to manage tax obligations more effectively, get in touch.

For tailored UK tax advice, visit www.vectigalistax.co.uk or email Angelo Chirulli at angelo@vectigalistax.co.uk.