As of November 2023, the current rates are:
- Late payment interest rate — 7.75% from 22 August 2023.
- Repayment interest rate — 4.25% from 22 August 2023.
The interest rates set by HM Revenue and Customs (HMRC) can apply to various situations, such as late payment or overpayment of taxes. There isn’t just one set rate, as rates vary depending on the specific circumstances and the type of tax involved. For the latest information, it is always best to refer to the HMRC website to ensure the accuracy of actual official rates and your compliance with current regulations.
How the interest rate is set
NS&I is a government bank that offers savings and investment options to its customers. The former chief executive of NS&I, Ian Ackerley, retired in March 2023 after completing a six-year term. NS&I is the only UK bank backed by His Majesty’s (HM) Treasury. Those looking to save or invest with NS&I must know that the bank changes its products from time to time. However, the products generally include:
- Late payment interest is set at the Bank of England base rate plus 2.5%. The late payment interest charged encourages people to pay their taxes promptly. It also ensures that those who do pay on time are treated fairly – if late payments weren’t penalised, it would be similar to receiving an interest-free loan from the taxman.
- Repayment interest is set at the base rate, minus 1%. The repayment interest rate is to compensate taxpayers fairly for when they overpay, which amounts to a loss of use of their money. There’s a lower limit of 0.5%, known as the minimum floor. The lower limit for repayment interest ensured that taxpayers still got 0.5% even when the base rate fell to 0.1% in recent years. The reason that repayment interest attracts a lower rate is to reflect the commercial market of loans and savings.
When is the HMRC official rate of interest applied?
The interest rate is applied when calculating how much is owed by a taxpayer with late payments or by HMRC to a taxpayer who has made overpayments.
Late payment of taxes
If a person or business does not pay their income tax or corporation tax when due, HMRC may apply interest on the outstanding amount. Interest is usually calculated from when the tax charge was due to when the actual payment was made.
Overpayment of taxes
In some cases, people or businesses make an overpayment, which means they will be due a refund from HMRC, and then interest is earned on the overpaid amount. To come to the final figure, HMRC calculates the interest from the date of the overpayment to when they transfer the refund.
Adjustments and assessments
In some cases, adjustments are made to a tax return – sometimes due to errors or if it is found that an individual needs to pay a higher rate of tax on some of their income – they could have received higher dividend payments or bonuses, for example. Interest in these instances may be applied to the underpaid amount. On the other hand, if HMRC owes a refund due to the adjustment, interest may be applied to the overpayment.
What is the average official rate?
The average official rate refers to beneficial loan arrangements. It is used to calculate the income tax charge on the benefit of employment-related loans. For further guidance, refer to the HMRC website for the latest advice or details.
How to ensure your UK tax payments are correct
To prevent the issue of late payments, underpayments or overpayments, there are a number of things you can do to stay on top of your taxes.
- .Keep accurate records.
- Know your tax obligations.
- Use online software.
- Seek advice.
- Read and check all HMRC communications.
Let’s look at these in more detail.
1. Keep accurate records
It can be a dull task, but keeping records of your income and expenses is a big help if you ever have a dispute with HMRC. In particular, ensure you have documentation for any beneficial loans and the subsequent beneficial loan arrangements you have.
2. Know your tax obligations
It’s up to you to know about any type of tax relief you may receive, any taxable benefit for which you may be eligible, and other exemptions which may affect your final tax bill. Whether you are submitting a self-assessment or filing business accounts, you need to know about your income tax, National Insurance contributions (NICs) and VAT obligations, amongst others. For instance, if you are a director of your own company, be sure of how a director’s loan is dealt with by HMRC or how any group pensions are accounted for. Your online self-assessment account on the HMRC website will be a good place to find this information.
3.Use online software
If you are not on PAYE and don’t benefit from employer-provided payslips where your tax is automatically taken, using software can be a huge help. Many banking apps have a way to categorise your spending transactions, but apps such as QuickBooks can be very helpful, particularly if you run your own business. Online software has a great deal of functionality that can help make your taxes far easier.
4. Seek advice
Tax can be complex, and individual circumstances vary. It may be an added expense, but seeking advice from a professional if you have a complex financial situation can be a big comfort. For instance, if you’re a sole trader or self-employed with several sources of income, your self-assessment may not be straightforward.
5. Read and check all HMRC communications
We’ve all done it. We’ve received a letter from HMRC and not paid attention to it – hoping for a quieter time where you can read it in peace. However, doing that often means you never get around to reading their letter or email at all, so you miss important information.
HMRC’s online portal can help as they send messages to your account there. Plus, it keeps all your information in one place. You’ll also find your tax code there, which you can review to ensure that it is accurate.
The HMRC official rate of interest
HMRC is making tax digital so that the issue of overpayment or late payments should be reduced. By making things digital, the idea is that fewer errors are made, and you can stay up to date on what your tax liability is likely to be when the whole tax year has finished. It should mean that it is far easier to be accurate when you report your taxes, even if you are dealing with things such as employment-related loans, so you can be sure when you pay your taxes, you are paying the right amount.