Starting from 6 April 2025, HMRC will increase interest rates on overdue tax payments, impacting businesses and individuals across the UK. The rise in interest charges is part of a broader effort to tackle growing tax arrears and encourage timely compliance with payment deadlines.
Currently, HMRC applies interest on overdue taxes at the Bank of England (BOE) base rate, adding 2.5 percentage points. This policy will see a significant change next spring when the base rate add-on increases to 4 percentage points, raising the overall interest rate from 7% to 8.5%.
According to the Autumn Budget 2024, this increase is intended to strengthen HMRC’s efforts in reducing the UK’s outstanding tax debts.
The New Pattern of Interest Rates
Under the revised structure, the interest rate on overdue tax payments will be calculated based on the BOE base rate plus 4 percentage points. This adjustment will result in a higher burden for those who fail to meet their tax deadlines, with the rate moving to 8.5% in April 2025.
The changes will affect a wide range of taxes, including income tax, National Insurance contributions, and VAT, placing more financial pressure on individuals and businesses with unpaid tax balances.
Alongside this, there will be specific modifications in other tax categories. For example, the interest on late Corporation Tax Quarterly Instalment Payments (QIPs) will rise, with the rate increasing from the BOE base rate plus 1 percentage point to BOE base rate plus 2.5 percentage points.
Customs Duty, too, will see a hike, with the interest rate climbing from the BOE base rate plus 2 percentage points to BOE base rate plus 3.5 percentage points. These changes reflect the government’s broader push to reduce the UK’s tax debt and enforce stricter compliance across various sectors.
Other Key Penalty Changes
The interest rate hike is not the only adjustment businesses and individuals will face. According to the Spring Statement of March 2025, the government will also introduce higher late payment charges for VAT.
In addition, the Making Tax Digital (MTD) penalty regime will come into effect for Income Tax, which will apply from the tax year when a taxpayer enters the system.
For businesses with outstanding VAT liabilities, the new system will impose an 8.5% interest rate, along with daily penalties that could accumulate up to 10% per year.
This shift aims to incentivise earlier tax payments and prevent arrears from mounting, but businesses can avoid these penalties by proactively arranging time-to-pay agreements.
