HMRC Interest Rate Increases for Late Tax Payments – What You Need to Know from April 2025

Effective from 6th April 2025, HMRC will increase the interest rate for late tax payments, including VAT, to 8.5%. 

This marks a significant rise from previous years, impacting businesses that may struggle with timely tax payments. Here’s everything you need to know about how this change could affect your business and what options you have.

How is the Late Payment Interest Rate Calculated?

The interest rate charged for late tax payments is based on the Bank of England's base rate, plus an additional 4%. Previously, this rate was calculated at the base rate plus 2.5%, but this recent increase has a major impact on businesses that may already be struggling with cash flow.

Key Facts:

• New interest rate: 8.5% (from 6th April 2025)

• Previous rate: 6.5% (base rate + 2.5%)

• Interest rate HMRC pays on refunds: Remains at 3.5% (base rate minus 1%)

  
  

Since 2022, HMRC has steadily increased late payment interest rates, which now sit 5.75% higher than before. Interestingly, interest paid by HMRC for delayed repayments is much lower, continuing the trend where the gap between taxpayer and HMRC rates grows wider. HMRC justifies this difference by noting that it aligns with international tax authority practices and commercial interest rates.

What Are ‘Time to Pay’ Arrangements?

If your business is facing difficulties paying tax debts, a Time to Pay (TTP) arrangement with HMRC can help spread the payments over time. While this option can help avoid penalties, it’s important to note that interest will still be charged and continues to accrue as long as the debt remains outstanding.

If you are struggling with your tax payments, setting up a TTP arrangement is a viable solution. However, keep in mind that with the new interest rates coming into effect in 2025, the cost of maintaining an outstanding debt with HMRC will increase, making it even more important to seek professional advice if you're entering into such an agreement.

Can I Appeal Against the Interest Charged by HMRC?

While there is no direct right of appeal against the interest charged for late payments, it is possible to challenge the interest after the debt has been paid if certain conditions apply. HMRC will review objections in the following situations:

1. HMRC error or unreasonable delay: If HMRC’s actions contributed to the build-up of the interest (e.g., processing delays or errors).

   
   

2. Disputed payment date: If you disagree with the effective date of the payment or the relevant dates used by HMRC.

   
   

3. Disputing legislation: If you believe the legislation applied to your case is incorrect or unfair.

   
   

4. Other exceptional cases: If you have a valid argument that the interest calculation is incorrect.

   
   

Any disputed interest cases are typically handled by HMRC’s Interest Dispute Unit. However, before lodging an appeal, you should first ensure that all payments are made, and then submit a formal objection to your local HMRC office.

The Growing Concern: Impact on Businesses

With late payment interest now expected to reach 8.5%, the growing divide between HMRC’s repayment interest and the rate for late payments raises concerns. While HMRC argues that this policy aligns with commercial standards and international tax authorities, businesses may be worried about the impact of these rising rates, especially as the economic climate continues to shift.

Will these changes encourage businesses to make timely payments, or will they push more businesses into financial difficulty? Only time will tell. But one thing is clear—it's crucial to keep your business’s cash flow in check and consider options like Time to Pay arrangements before things get out of hand.

What Should You Do?

If your business is at risk of late payments, there are steps you can take now to avoid unnecessary interest payments:

1. Plan ahead: Ensure your business can cover upcoming tax liabilities. If you know you’ll struggle, reach out to HMRC to arrange a Time to Pay agreement early.

2. Consult with an expert: Work with an accountant or tax professional to review your tax affairs and ensure that payments are made on time. If necessary, get advice on managing your cash flow or negotiating with HMRC.

3. Stay informed: Keep up with HMRC’s updates on tax interest rates and deadlines, and be proactive in managing your tax responsibilities.

   
   

Contact Us for Guidance

The rising interest rates can be a headache for any business, but with the right planning and expert guidance, you can navigate these changes effectively.

If you’re unsure about how these changes will affect you or need help negotiating a Time to Pay arrangement with HMRC, don’t hesitate to get in touch with our team. We’re here to help you make informed decisions and keep your business on track.