How much interest do HMRC charge?

HMRC expect everything you owe them to be paid on time and in full – but you already know that!

Less well known though is they’re willing to help both personal and corporate tax payers if they’re unable to meet their obligations by the date due but, and this is important, you first must apply for help.

If you don’t, HMRC will issue you with penalties and then charge you interest on the amount you owe and on the penalties/fines you accrue.

There is a way to avoid both penalties and interest on late payments to HMRC and we’ll show you exactly what you need to do in this article.

We’ll also share with you information on:

• fines and interest payable for overdue Self-Assessment returns/settlements;
• fines and interest payable for overdue Corporation Tax returns/settlements;
• fines and interest payable for overdue VAT returns/settlements;
• fines and interest payable on late PAYE returns/settlements;
• how to avoid fines and interest with a “Time To Pay” arrangement;
• what HMRC’s current overdue payment interest rates are; and
• business owners’ most frequently ask questions about late payment interest.

Late payment penalties for overdue Self-Assessment returns

If you’re late returning your Self-Assessment tax return (and this applies even if you’ve paid the tax you owe resulting from that return), you’ll be subject to the following penalties on these submission dates:

• 1 Feb-31 Apr – £100 fine;
• 1 May-31 July – £10 daily fine up to a maximum of £900 for every day HMRC have not received it;
• 1 Aug-31 Jan – the greater of 5% of the amount owed or £300; and
• 1 Feb (one year later) – the greater of 5% of the tax you owe or £300.

If you don’t make payment to HMRC on time, there are additional penalties on top and they are:

• 1 Mar-31 July – 5% of tax owed;
• 1 Aug-31 Jan – 5% of tax owed; and
• 1 Feb (one year later) – 5% of tax owed.

As soon as either your return and/or payment is overdue, you’ll be charged a rate of 3% on both the taxed owed and the fines issued. To navigate the complexities of Self-Assessment returns and avoid late payment penalties, seeking the guidance of a self-assessment accountant is crucial. Timely assistance can help prevent additional penalties and ensure compliance with HMRC regulations.

Late payment of corporation tax

If you don’t file your company tax returns on time, the following penalties apply:

• 1 day overdue – £100;
• 3 months overdue – another £100;
• 6 months overdue – HMRC will send you an estimate of what they think your corporation tax will be with an additional penalty of 10% on top; and
• 1 Feb (one year overdue) – a further penalty of 10% of unpaid tax

You will pay 2.6% on the amount owed by you plus fines. The £100 fines shown above go up to £500 if you’re late three years in a row with your filing your returns.

Late payment of VAT

VAT works on a system of defaults.

If you’re late in filing a return and/or you don’t settle what is owed in time, they issue you with a surcharge but this won’t cost you anything the first time around. If you’re not late again within one year, the surcharge will be dropped.

However, if you are late again within the year, you’ll then pay a penalty each time based upon a percentage of the outstanding VAT owed. They may also fine you £400 for submitting a paper VAT return and 100% of understated VAT payment or overclaimed VAT refund if the error was careless or deliberate.

With some VAT-registered businesses, HMRC may send out an assessment of what they think you owe if you are late in returning your form and in paying what is owed to them. If their assessment is too low and you don’t then subsequently inform them that it’s too low, they will fine you 30% of the value given in the assessment.

Late payment of PAYE

For late payment of PAYE tax, you won’t be fined or penalised for one late submission (as long as the submission is not six months or more late). However, if more than one return is late at any given time, the following fines apply:

• 1% of the value of unpaid PAYE in that tax year for between one and three late payments;
• 2% for four to six late payments;
• 3% for seven to nine late payment; and
• 4% for ten or more late payments.

Interest will accrue on the unpaid PAYE and on the fines at a rate of 2.75% a month from the date on which a payment was due.

Avoid paying fines and interest altogether by entering a “Time To Pay” arrangement with HMRC

You can avoid having to pay interest on your outstanding tax and associated penalties by approaching HMRC and asking them for a “Time To Pay” arrangement.

With a “Time To Pay” arrangement, you can spread payment of what you owe over up to 12 months. Most arrangements are for around 6 months and, in some rare cases, a repayment period of more than 12 months may be agreed.

No interest is charged to either personal or corporate tax payers who enter a “Time To Pay” arrangement and no fines are issued either.

How much interest do you pay on late tax?

Interest rates on late Income Tax, National Insurance contributions, Capital Gain Tax, Stamp Duty Land Tax, Stamp Duty and Stamp Duty Reserve Tax payments

The current late payment interest rate is 2.60% and this rate has been applied by HMRC since 7 April 2020. Repayment interest for when you make payment of these taxes early is 0.5% and this rate has been applied since 29 September 2009.

Interest rates on late Inheritance Tax, Capital Transfer Tax and Estate Duty – Reg 4A payments

The current late payment interest rate is 2.6% and the repayment rate is 0.5%.

Interest rates on late Corporation Tax Self-Assessment payments

The current rate of interest charged on an underpaid quarterly instalment payment is 1.10% and this rate has been in force since 30 March 2020.

The interest paid to you on overpaid quarterly instalment payments and on early payments of Corporation Tax not due by instalments is 0.5% and this has been so since 30 March 2020.

2.6% is charged on judgement debt taxation matters and this rate was set on 7 April 2020.

Interest rates on late payment on IT-CP and other duties attracting section 87 interest

The current late payment interest rate is 2.60% as of 7 April 2020.

Interest rates on late VAT, Air Passenger Duty, Insurance Premium Tax, environmental taxes, Customs Duty and Excise Duty Drawback payments

The current late payment interest rate is 2.60% as of 7 April 2020 with the early repayment rate at 0.5%.

HMRC late payment interest Quick FAQ

What happens if you pay HMRC late?

You need to pay HMRC in full before the due deadline (as well as complete the form which reports the level of tax you are due to pay) unless you can provide them with a “reasonable” excuse.

Excuses HMRC considers as reasonable include:

• the death of a partner or close relative just before the payment/return deadline;
• an unexpected stay in hospital or life threatening illness;
• disability-related delays; and
• problems with HMRC’s online services and so on.

You may need to send various documents to HMRC to prove why you couldn’t have submitted your form or paid your bill on time by the date required.

If the taxman accepts the excuse you’ve given, you still need to settle up as soon as practically possible once the situation which prevented payment has been resolved.

HMRC have published guidance on the circumstances under which they will accept a delay here.

How are HMRC penalties/fines calculated?

HMRC have two definitions of a penalty/fine – a fixed penalty/fine or a variable penalty/fine.

A fixed penalty generally refers to a fixed sum of money you have to pay for filing overdue returns and/or for an overdue payment (like the £100 for being a day late with your personal Self-Assessment)

A variable penalty (sometimes called a “penalty for errors”) is applied when a return you’ve filed for either this tax year or for previous tax years appears to misrepresent or understate the amount of tax you have to pay.

The variable penalty is normally charged at a percentage of the amount HMRC believes you have underpaid them.

The size of a variable penalty charged to you by HMRC will generally increase:

• The more tax owed;
• The less HMRC believe your excuse for the errors you made; and
• If they had to approach you about it rather than you approach them.

The three variable penalty “error” classifications are “careless”, “deliberate”, and “deliberate and concealed”.

HMRC charges interest on:

• Each overdue payment of tax; and
• Any fines you have also occurred as a result of not filing or paying on time.

Does HMRC charge interest on interest?

HMRC is only permitted to charge simple interest on tax owed and any fines or penalties issued. They are not permitted to charge interest on top of interest.

How has Coronavirus (COVID-19) affected HMRC’s approach?

Since the outbreak of the Coronavirus (COVID-19) pandemic, HMRC and the government have launched various initiatives giving personal and corporate tax payers more time to settle up.

An example of this support is that the self-employed and company directors who report their tax liabilities to HMRC using a Self-Assessment form may now pay down their outstanding tax by monthly repayments.

You may wish to approach HMRC to check to see if you can reduce the amounts due on your “payments on account” also, particularly if your income has been hit by the economic shock caused by the pandemic.

You can also apply online for the Self-Employment Income Support Scheme. You may choose to use this taxable grant to settle outstanding tax owed to HMRC but please remember that this is not a condition of being accepted for the scheme.

You can find regularly updated guidance on the various schemes already available together with details on each scheme on HMRC’s website.

Avoid late payment penalties with Black & White Accounting

With regular bookkeeping and accurate accounting, you’ll know how much tax you’ll need to find well in advance so that you can make full and proper provision for it. Better still, you’ll know that both your personal and corporate Self-Assessment tax returns are being taken care of meaning that you’ll avoid late payment fines and interest in the future.

Black and White Accounting helps hundreds of individuals and small business owners across the UK to reduce their tax bills through the efficient and accurate use of each available tax relief and knowing what tax is due and how to pay it, in plenty of time. To find out more, please call our tax team on 0800 140 464 or click here to email us.

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