HMRC’s interest rate charged on unpaid tax rises to a 13-year high of 4.25%, which is six times the rate paid on money HMRC owes it’s customers. In contrast, the rate HMRC pays on repayments to customers is far less generous and has increased from 0.5% to 0.75%.
While the differential in HMRC’s interest rates may seem surprising, it is in line with tax policy in other countries. 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.
The increase is linked to the Bank of England raising the base rate from 1.25% to 1.75% — the largest single jump in 27 years. And because HMRC rates are set in legislation the increase (effective from 23 August 2022) is unavoidable.
This comes at a time when many people are concerned about their financial position due to rising costs and the prospect of a recession, so the last thing they can afford is more interest on any tax owed. Also, many businesses will have entered into time to pay (TTP) agreements with HMRC intended to support them through COVID support, and depending on the outstanding balance the change in interest rates could be very significant.
Whether it’s business or personal tax owed, the new interest rates mean that taxpayers should settle as much of their outstanding tax liability as they can afford.