HMRC recently announced an interest rate change for late tax payments, lowering the rate from 7.5% to 7.25% from November 18th. 

This adjustment follows a cut in the Bank of England’s base rate, but the reduced rate might not feel like much of a relief for taxpayers who end up paying more interest than they’d receive on a refund. While late payment interest remains high, the rate for taxpayers owed refunds from HMRC is only 3.75%. Is this imbalance fair?

Why the difference?

The interest HMRC charges is set at the Bank of England’s base rate plus 2.5%, while the rate for refunds is lower, typically around the base rate plus 0.5%. This setup allows HMRC to charge higher rates on late payments than it offers on overpayments. 

Many tax experts have argued that this creates an unfair situation, especially for the self-employed, who may face challenges in balancing multiple tax deadlines. With the January 31st Self-Assessment deadline on the horizon, this disparity puts more pressure on those who need to get their tax affairs in order.

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What this means for taxpayers

For anyone struggling to meet the Self Assessment deadline, the high 7.25% interest rate can quickly add up, especially if payment delays extend beyond a few months. And with late payment interest stacking up alongside penalties, the consequences of missing deadlines become costly. 

On the flip side, taxpayers owed refunds will receive only 3.75% interest – far lower than the rate they’d be charged if they were the ones owing.

What can taxpayers do?

The best way to avoid the impact of these differing rates is to stay on top of tax payments and deadlines. For the self-employed, this means preparing for the January deadline well in advance, organising finances, and ensuring accurate calculations. Seeking support from an online accountant, like Crunch, can be invaluable for managing these complexities, avoiding penalties, and ensuring deadlines are met.

As the discussion on interest rates continues, many believe HMRC should review its policies to create a fairer system. For now, taxpayers should remain aware of the potential costs of late payments – and plan accordingly.