HMRC increases late payment interest

HMRC has announced that interest rate will increase with effect from 15 August 2022 for late quarterly instalment payments, and that late payment interest for other late payments will increase from 23 August 2022.

The change comes after The Bank of England (BoE) Monetary Policy Committee voted on 4 August 2022 to increase the BoE base rate to 1.75% from 1.25%, this is due to HMRC interest rates being linked to theBoE base rate.

The repayment interest rate will increase to 0.75%. The repayment rate is set at bank rate minus 1%, with a 0.5% lower limit.

Late payment interest is set at base rate plus 2.5%. Repayment interest is set at base rate minus 1%, with a lower limit or ‘minimum floor’ of 0.5%.

The minimum floor ensured that taxpayers continued to receive 0.5% repayment interest even when the base rate fell to 0.1%. Repayment interest will continue to be paid at 0.5% until the BoE raises base rate above 1.5%, after which repayment interest will increase with base rate.

The differential between late payment interest and repayment interest is in line with the policy of other tax authorities worldwide and compares favourably with commercial practice for interest charged on loans or overdrafts and interest paid on deposits.

HMRC added the rate of late payment interest “encourages prompt payment and ensures fairness for those who pay their tax on time”, while the rate of repayment interest fairly compensates taxpayers for loss of use of their money when they overpay or pay early.