When you pay your tax late, HMRC charges interest on the outstanding amount from the day it was due. These interest charges are separate from any late filing penalties and accrue daily until the tax is paid in full. Understanding how HMRC interest works — and what you can do to minimise the cost — is essential for anyone who might struggle to pay their tax on time.
How HMRC Sets Its Interest Rate
HMRC’s interest rate on late tax payments is linked to the Bank of England base rate. The formula is:
HMRC late payment interest = Bank of England base rate + 2.5%
As of March 2026, with the Bank of England base rate at 4.5%, the HMRC late payment interest rate is 7.0% per year.
This rate applies to:
- Income tax (including Self Assessment balancing payments)
- Capital gains tax
- National Insurance contributions
- VAT
- Corporation tax
- Inheritance tax
- Stamp duty land tax (SDLT)
The rate changes whenever the Bank of England adjusts its base rate. HMRC updates its rates within 13 working days of a base rate change. You can find the current HMRC interest rates at gov.uk/government/publications/rates-and-allowances-hmrc-interest-rates-for-late-and-early-payments.
How Interest Is Calculated
HMRC charges simple (not compound) interest on late tax, but because it accrues daily, the effect is similar to compound interest over longer periods.
The daily rate is approximately the annual rate divided by 365. At 7.0% per year:
- Daily rate: approximately 0.01918% per day
- Monthly rate: approximately 0.583% per month
Example: Self Assessment Balancing Payment
Suppose you owe £5,000 in income tax for 2025-26, due on 31 January 2027. You pay it 90 days late (on 1 May 2027):
- Outstanding tax: £5,000
- Interest rate: 7.0% per year (0.01918% per day)
- Days late: 90
- Interest: £5,000 × 0.01918% × 90 = £86.31
A relatively short delay of three months results in an £86 interest charge on top of the £5,000 owed. Over a full year, the interest on the same amount would be £350.
For larger tax bills, the interest becomes more significant. A £50,000 CGT bill paid 6 months late would attract approximately £1,750 in interest.
Late Payment Penalties (Separate From Interest)
HMRC charges separate late payment penalties in addition to interest. These are:
- 5% surcharge on any tax unpaid 30 days after the deadline (for Self Assessment, this is 2 March for a 31 January deadline)
- Further 5% surcharge at 6 months after the deadline (1 August)
- Further 5% surcharge at 12 months after the deadline (1 February)
These penalties apply to the original unpaid amount, not to the interest. So if you owe £5,000 and don’t pay it for 6 months:
- 5% surcharge at 30 days: £250
- 5% surcharge at 6 months: £250
- Interest for 6 months: approximately £175
- Total additional cost: approximately £675
Late filing penalties are applied separately again — you can face both late filing and late payment charges simultaneously.
Repayment Interest: What HMRC Pays You
When HMRC owes you money (because you’ve overpaid tax), they pay interest on the repayment. However, HMRC’s repayment interest rate is lower than its late payment rate:
Repayment interest = Bank of England base rate − 1% (minimum 0.5%)
At a base rate of 4.5%, the repayment interest rate is 3.5%.
This asymmetry means HMRC charges you more when you pay late than it pays you when it owes you money. The 3.5-percentage-point difference is intentional — it incentivises timely payment.
Repayment interest applies to:
- Tax overpayments you claim back via Self Assessment
- PAYE refunds for overpaid income tax
- VAT repayments
Note that repayment interest is taxable income — it counts toward your income tax liability and must be declared on your Self Assessment return if it exceeds your Personal Savings Allowance.
Interest on Payments on Account
Payments on account — advance payments toward next year’s Self Assessment bill, due 31 January and 31 July — are also subject to late payment interest if not paid on time.
If you reduce your payments on account (because you think your income will be lower) and your actual tax bill turns out to be higher than estimated, HMRC will charge interest on the shortfall in the reduced payments from the original payment due dates, not just from the final balancing payment date.
This means careless use of the “reduce payments on account” option can result in interest charges going back to January or July — sometimes a year before the final bill is worked out.
Time to Pay Arrangements: Stop Interest Accruing?
A Time to Pay (TTP) arrangement allows you to spread your tax payments over an agreed period (typically monthly instalments over up to 12 months, though longer periods may be agreed for genuine hardship).
However, a TTP arrangement does not stop interest accruing on the unpaid balance. Interest continues to run throughout the TTP period at the prevailing HMRC rate. The benefit of a TTP is that HMRC agrees not to charge late payment surcharges (the 5% penalties) as long as you stick to the arrangement — but you still pay daily interest.
Given the current 7.0% rate, spreading a £20,000 tax bill over 12 months means paying approximately £763 in interest over the year.
How to Set Up a Time to Pay Arrangement
For Self Assessment debts under £30,000 where your return is already filed, you can set up a TTP arrangement online via your HMRC Personal Tax Account (without needing to call). This is the fastest route.
For larger amounts or if online application isn’t available, call HMRC’s Payment Support Service on 0300 200 3835. Have your UTR, bank details, and information about your income and expenses ready.
Apply before the deadline where possible — HMRC is more likely to agree favourable terms if you contact them proactively rather than after the debt becomes overdue.
Strategies to Avoid HMRC Interest
Pay on Time Wherever Possible
The most effective way to avoid interest is simply to pay by the deadline. For Self Assessment, this means:
- 31 January: balancing payment for previous year + first payment on account for current year
- 31 July: second payment on account for current year
If you file your return early (HMRC accepts returns from 6 April), you’ll know your bill well in advance and can plan accordingly.
Budget Monthly Using a Tax Savings Account
Many self-employed people and landlords maintain a separate savings account where they set aside a percentage of income each month to cover their tax bill. A rough guide for sole traders:
- 20–25% of profit if a basic rate taxpayer
- 40%+ of profit if a higher rate taxpayer (to cover both income tax and Class 4 NI)
Keeping this money in an instant-access savings account earns some interest in the meantime — currently around 4–5% for easy-access accounts — partially offsetting the HMRC interest rate if you do pay late.
Consider Reducing Payments on Account Carefully
If your income has genuinely fallen, reducing payments on account is sensible and saves you from overpaying tax throughout the year. But make a reasonable estimate — if you reduce too aggressively and your income ends up being higher, you’ll face interest backdated to the original payment dates.
Check for Overpayments
If HMRC owes you a refund, claim it promptly. Repayment interest (3.5% at current rates) is not generous, but there is no advantage to leaving overpaid tax sitting with HMRC.
Use our self-employment tax calculator to estimate your Self Assessment bill and plan your payments for the 2025-26 tax year.