From April 2025, HMRC late payment interest rate has increased to 8.5%, marking a significant jump and reaching the highest level seen in decades. This follows a broader Government focus on strengthening tax compliance, alongside recent increases in National Insurance and corporation tax.

The move places greater pressure on both businesses and individuals who find themselves falling behind on their tax obligations – making timely payment and proactive planning more important than ever.

What’s changed?

Previously, late payment interest was calculated at the Bank of England base rate plus 2.5%. However, from 6 April 2025, HMRC has adjusted this formula to base rate plus 4%, taking the late payment interest rate to 8.5%.

In contrast, where HMRC pays interest on tax refunds, the repayment rate remains at base rate minus 1% – currently just 3.5%. This widening gap between what HMRC charges and pays has not gone unnoticed.

Why the HMRC late payment interest rise now?

This increase follows measures announced in the 2025 Spring Statement, where the Government outlined plans to clamp down on tax avoidance and evasion. With HMRC under pressure to reduce the tax gap and recover unpaid taxes, the rise in interest is part of a broader strategy to encourage on-time payment and improve compliance.

As a result, we can expect to see increased scrutiny from HMRC across all areas of taxation – reinforcing the need for accurate reporting and effective planning.

Corporation Tax: quarterly payments affected

For companies paying corporation tax by quarterly instalments, there’s a separate adjustment. From 6 April 2025, the interest rate on underpaid instalments has increased to 7%, up from 5.5%.

With many businesses already managing the challenges of rising costs and tighter margins, cashflow planning is now critical. We strongly recommend implementing tools such as a rolling 13-week cashflow forecast, which can help identify potential payment shortfalls early and allow time to take action.

Individuals: Income Tax and Capital Gains Tax late payments

Late payment of income tax or capital gains tax can now become significantly more costly.

On top of the 8.5% interest, HMRC also applies late payment penalties of:

• 5% of unpaid tax after 30 days

• An additional 5% at six months

• A further 5% at 12 months

Where tax returns are filed three months or more after the deadline, individuals may also face daily and fixed penalties.

Looking ahead, the roll-out of Making Tax Digital for Income Tax from April 2026 will mean quarterly reporting for landlords, sole traders, and the self-employed with income over £50,000. If you’re unsure whether you’ll be affected, we’re happy to help clarify and support you with compliance requirements.

VAT: don’t forget the new penalty regime

Under Making Tax Digital for VAT, those required to file VAT returns may face late payment interest, as well as separate penalties for late filing and late payment.

It’s important to ensure VAT processes are accurate and submitted on time to avoid unnecessary costs.

Can’t pay your tax bill?

If you’re struggling to pay a tax bill, HMRC’s Time to Pay (TTP) arrangement could be an option. This allows tax debts to be repaid in instalments, but HMRC may ask for detailed financial information to assess affordability – and may continue to monitor compliance throughout.

Before applying, it can be wise to seek advice, especially if your business is facing wider financial difficulties. Working with an insolvency and restructuring expert can help determine the best route forward.

HMRC enquiries on the rise

In the 2023/24 tax year, HMRC collected a record £843.4 billion, up 3.6% year-on-year. This is set to rise further, with a target of generating an additional £1 billion by 2029 through closing the tax gap.

To support this, HMRC is ramping up compliance activity. Around 500 new compliance officers are being recruited – on top of the 5,000 already planned – and they’ll be focusing on targeted investigations across the UK.

The takeaway? Accurate reporting, timely filing, and strong financial controls are more important than ever.

Get in touch with us here at IN Accountancy if you require support, and check out our YouTube Channel for loads of tax tips!

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