The Bank of England has raised interest rates for the thirteenth time in a row and on this occasion, the increase is 0.5 percentage points. This takes the base rate to 5% – a 15-year high.

Many of our clients will be concerned about what the hike means for their businesses and personal finances, but one aspect you may not have thought about is the amount of late payment interest you could risk having to pay to HMRC should your tax bill be settled late.

HMRC charges interest on all late payments of tax. The rate of interest is set out in legislation and is linked to the Bank of England base rate. Late payment interest is set at base rate plus 2.5%, meaning those who pay their tax late will now face a charge of 7.5%.

Interest is charged from the date the payment becomes due until the day of payment. The charge is automatic and HMRC does not have any discretion over whether to charge interest. It’s therefore important to consider the impact that the charge could have on the overall amount owed, should you pay your tax bill late.

Late payment interest is a particularly relevant issue at this time of year. If you pay income tax via Self Assessment, you may be due to make a payment on account towards your income tax liability by 31 July 2023. HMRC will charge late payment interest if these payments are paid late. Completing your tax return early and in advance of 31^st July can sometimes be helpful if you are due to make a payment on account, especially if your income in the current tax year has reduced – a reality for many sole traders during the current cost of living crisis.

Completing your tax return early means that your tax liability for the whole 2022/23 tax year can be ascertained now. If your liability for 2022/23 is less than the total liability for the prior tax year (on which your payments on account are based) you may be able to pay less in July, or perhaps have no payment to make at all. It is therefore worth getting your tax return information to your tax adviser as soon as possible.

There is also an option to make a claim to reduce your payments on account, if your income has reduced and you believe your tax liability will be less than the year before. However, be warned that should your payments on account be reduced by too much, HMRC will charge interest on the difference – again, at 7.5%.

It’s not all bad news though. HMRC will also pay repayment interest on any money they owe you. However, this is set at base rate minus 1%, arguably inequitable when compared to the late payment interest rate.

Don’t hesitate to contact our Private Client team if we can assist with your personal tax affairs or if you would like any further information.

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