June 11, 2025
Article
Historically, HMRC have been viewed as ‘cheap debt’ with tax payers occasionally delaying payment since interest rates on the open market were much higher. However, from 6 April 2025, the gap begins to close and it’s important you are aware of the upcoming changes.
Increased payment penalties
The spring budget on 26 March announced that the government will be increasing late payment penalties for VAT and income tax from 5 April 2025.
This large increase could substantially impact a small business who pays late. It’s important you set reminders so you and your business do not fall foul of the higher rates.
Not only have the penalties increased, but HMRC are also going to be restarting “direct recovery” from taxpayers who are able to pay, but choose not to. This gives them the power to directly recover the tax owed from banks and buildings societies of the taxpayer. This should only occur where the debtor repeatedly ignores correspondence from HMRC.
HMRC’s official rate of interest
From 6 April 2025, HMRC’s official rate of interest will increase from 2.25% to 3.75%. This is the rate used to calculate things such as benefits in kind for living accommodation and tax payable on overdrawn director loan accounts.
Historically, the official rate has only been reviewed on an annual basis. The October budget informed us that in future, the rates would be reviewed on a quarterly basis, meaning rates could increase further throughout 2025/26.
Late payment interest
Currently, the interest you pay to HMRC on late payments is set at 2.5% above base rate. After 6 April 2025, this rate will increase to 4% above base which, based on the rates at the time of writing, would be an actual rate of 8.25%.
Further details can be found on the GOV UK website here: HMRC interest rates for late and early payments - GOV.UK
Whilst this rate might still be lower than an average company credit card rate and perhaps overdraft interest, it does demonstrate the government’s desire to deter late payments and to generate more income from late payers.
Illustration:
A Ltd owes £50,000 corporation tax to HMRC. The due date for this payment was 31 December 2024. Due to cash flow issues, A Ltd settled their tax late with HMRC on 5 April 2025. If the late payment rate was consistently 7%, the total interest payable was:
£50,000 x ((95/365) x 7%) = £911.
If the interest rate were instead at 8.25%, this would’ve cost A Ltd £1,074.
Whilst the increase might seem small in the grand scheme of things, consider whether the additional interest is affordable in line with the other implications facing businesses in 2025/26.
Can your business afford this with increased minimum wages thresholds, employer national insurance contributions, business rates and general cost of living rises? Do you think the interest rates will go up or down in future?
We recommend that you speak to HMRC and get payment plans in place as soon as possible if you are struggling to pay. This will keep them on side and will show co-operation, resulting in less long-term stress for you.
You can find out about payment plans here: If you cannot pay your tax bill on time: Setting up a payment plan - GOV.UK
If you would like to discuss the impact of the interest rate increases on you or your business, feel free to get in touch with your usual Albert Goodman contact.