Introduction
As the cost-of-living pressures continue to affect households and small businesses alike, missing a tax payment can feel like a temporary relief. Unfortunately, with HMRC charging 7.75% interest on late payments and applying further surcharges if delays persist, procrastination can prove very expensive.
In real terms, a taxpayer with a £20,000 bill could lose more than £1,600 in penalties and interest within months — an entirely avoidable cost. This article explains how HMRC’s late-payment interest system works, why the rate is so high, and how to avoid unnecessary charges through planning, time-to-pay arrangements, and professional guidance.
The Rise of the 7.75% Rate
HMRC late-payment interest is pegged to the Bank of England base rate plus 2.5%. When the base rate stood near zero, taxpayers hardly noticed it. But with recent monetary tightening, the rate has climbed sharply — reaching 7.75%in 2025.
| Date | Base Rate | HMRC Late Payment Rate |
|---|---|---|
| March 2021 | 0.10% | 2.60% |
| August 2023 | 5.25% | 7.75% |
| 2025 (current) | 5.25% | 7.75% |
That means every day a bill remains unpaid, HMRC accrues interest at roughly 0.021% per day.
The Real-World Cost: £20,000 Bill Example
Let’s examine the effect on a self-employed taxpayer owing £20,000 after filing a Self-Assessment return late.
| Delay Period | Interest Rate | Cost |
|---|---|---|
| 30 days | 7.75% annual | £127 |
| 90 days | 7.75% annual | £382 |
| 6 months | 7.75% annual | £775 |
| 12 months | 7.75% annual | £1,550 |
In addition to the interest, HMRC can apply penalties depending on how late the payment is, easily pushing the total above £1,600 within a year.
Late Payment Penalties: How They Work
The penalty regime for Self-Assessment and other personal taxes includes two distinct elements:
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Late Filing Penalties – for submitting your tax return after the deadline.
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Late Payment Penalties – for paying your tax bill after the due date.
1. Late Filing Penalties
| Delay | Penalty |
|---|---|
| 1 day late | £100 fixed penalty |
| 3 months late | £10 per day (up to £900) |
| 6 months late | 5% of tax due or £300 (whichever is greater) |
| 12 months late | Additional 5% or £300 (whichever is greater) |
2. Late Payment Penalties
| Delay | Penalty |
|---|---|
| 30 days | 5% of unpaid tax |
| 6 months | Additional 5% |
| 12 months | Further 5% |
If a taxpayer owes £20,000 and pays a year late:
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30-day penalty = £1,000
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6-month penalty = £1,000
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12-month penalty = £1,000
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Interest at 7.75% = £1,550
Total cost: £4,550 – a painful 22.75% surcharge.
Why HMRC Charges Interest at This Level
The policy is simple: HMRC wants taxpayers to pay on time. By pegging its rate above the Bank of England base rate, it discourages deliberate delays and ensures fairness to those who do pay promptly.
The rate is not designed to be punitive but compensatory — representing the economic cost of late payment to the Exchequer. However, in practice, it often feels punitive for taxpayers unaware of how quickly these charges escalate.
How to Avoid Late Payment Penalties
1. File Your Tax Return Early
Filing early does not mean paying early — but it gives you clarity about what you owe. Early filing allows time to plan, save, and seek professional help if your liability is higher than expected.
2. Use a “Time to Pay” Arrangement
If you cannot pay in full, contact HMRC as soon as possible to request a Time to Pay (TTP) arrangement. This formal agreement spreads your tax bill over manageable monthly instalments, usually up to 12 months.
While interest still applies, you avoid the 5% late-payment penalties as long as you keep up with the instalments.
3. Pay via the Correct Method
Electronic payments can take varying times to clear:
| Payment Method | Clearing Time |
|---|---|
| Faster Payments / Online Banking | Same or next day |
| CHAPS | Same day |
| BACS | 3 working days |
| Debit/Credit Card via HMRC portal | Immediate |
| Cheque | Up to 5 working days |
If payment clears even one day after the deadline, interest starts accruing from day one.
4. Keep HMRC Updated
If you move house or change email addresses, update HMRC promptly. Many missed payments result from not receiving reminders or statements.
5. Budget Throughout the Year
Self-employed individuals should set aside roughly 25%–30% of earnings in a separate savings account for tax. Treat it as a non-negotiable expense to avoid last-minute surprises.
Self-Assessment Deadlines to Remember
| Event | Deadline |
|---|---|
| Online filing for previous tax year | 31 January |
| Payment of outstanding balance | 31 January |
| First Payment on Account | 31 January |
| Second Payment on Account | 31 July |
Missing either January or July deadlines triggers interest and potentially penalties.
Payments on Account and the Surprise Shortfall
Many first-time Self-Assessment taxpayers fall into the “payment on account” trap. HMRC assumes next year’s liability will match the current year’s and requests two advance payments — each 50% of the total bill.
Example:
If your 2023/24 tax bill is £20,000, HMRC expects:
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£20,000 due by 31 January 2025 (for 2023/24)
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Plus £10,000 “first payment on account” for 2024/25
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Total due by 31 January 2025 = £30,000
If you pay only £20,000, the remaining £10,000 accrues interest at 7.75% until paid — adding £775 a year in interest alone.
Impact on Small Businesses and Freelancers
The 7.75% rate hits small business owners hardest, especially those managing irregular income. Late VAT, PAYE, or Corporation Tax payments are subject to the same rates, though penalty structures differ slightly.
With HMRC increasing compliance activity post-pandemic, even minor delays can lead to formal payment demands or debt-collection proceedings. Proactive communication with HMRC can prevent escalation.
When HMRC Will Waive Penalties
HMRC may cancel penalties if there is a “reasonable excuse” — defined narrowly, but not impossible to claim. Examples include:
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Serious illness or bereavement
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HMRC online system failure
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Unexpected postal or banking delays
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Incorrect advice given directly by HMRC
Temporary cash-flow difficulties are not considered reasonable excuses, but they can justify a Time-to-Pay plan.
Time to Pay: How It Works
You can apply online if your total Self-Assessment bill (including interest) is under £30,000 and you intend to clear it within 12 months.
Eligibility criteria:
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Tax returns up to date
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No other payment plans in place
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No outstanding HMRC debts
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Application made within 60 days of the due date
Approval is automatic in most cases, avoiding penalties as long as payments are made on schedule.
Late Payment Interest on Other Taxes
| Tax Type | Interest Rate | Notes |
|---|---|---|
| Income Tax / Self-Assessment | 7.75% | From due date until paid |
| Corporation Tax | 7.75% | From normal due date |
| PAYE / NIC | 7.75% | Calculated daily |
| VAT | 7.75% | Daily interest, plus penalty regime |
| Inheritance Tax | 7.75% | Daily charge from due date |
The uniformity of rates reflects HMRC’s intention to treat all taxpayers consistently, regardless of tax type.
Practical Example: Avoiding £1,600 in Costs
Let’s revisit the £20,000 example.
| Timeline | Action | Outcome |
|---|---|---|
| 31 Jan | Missed payment | Interest begins |
| 15 Feb | Sets up Time to Pay (12 months) | No 5% penalty applied |
| 28 Feb | First instalment made | Ongoing interest (c. £650 total) |
| 31 Jan (next year) | All payments complete | Total cost £650 vs £1,600+ without plan |
Early communication and structured repayment save nearly £1,000 in this simple case.
When to Seek Professional Advice
Tax penalties and interest calculations can quickly become complex, especially if multiple years or tax types are involved. Professional firms such as My Tax Accountant can:
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Review HMRC correspondence for accuracy
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Negotiate Time-to-Pay terms
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Identify overpaid penalties or interest
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Prevent future late-payment exposure through structured planning
Their expertise ensures compliance while minimising unnecessary financial strain.
Frequently Asked Questions (FAQs)
1. What is HMRC’s current late payment interest rate?
As of 2025, it is 7.75%, calculated daily.
2. When does interest start accruing?
From the day after the payment due date, until full payment is received.
3. Is the interest tax-deductible?
No. HMRC interest and penalties are not deductible for Income Tax or Corporation Tax purposes.
4. Can I pay HMRC in instalments?
Yes, through a Time-to-Pay plan if you meet eligibility criteria.
5. Will HMRC send reminders before charging penalties?
Not always. Responsibility for timely payment lies with the taxpayer.
6. Can I appeal a penalty?
Yes, within 30 days of the penalty notice, if you have a reasonable excuse.
7. What if I cannot pay even with instalments?
Seek advice immediately. HMRC can consider longer-term arrangements or temporary deferrals in extreme hardship cases.
Conclusion
With HMRC interest at 7.75%, delaying payment has become an expensive mistake. A £20,000 bill left for a year could cost over £1,600 in interest and penalties — and that figure can double if penalties stack across multiple taxes.
Timely filing, proactive budgeting, and swift communication with HMRC are the best defences. When cash-flow challenges arise, a Time-to-Pay arrangement or early professional intervention can prevent spiralling costs.
In short: treat 31 January not as a suggestion, but as a firm deadline. Every day beyond that costs you money.
