Why it pays to pay tax on time | HMRC late payment interest explained

When you fail to pay tax by its due date, HM Revenue & Customs (HMRC) immediately begins charging late payment interest from the very day your obligation becomes overdue. In the last few years, the rate of interest HMRC charges has risen dramatically. Understanding these changes is not just about avoiding extra costs, it explains why it pays to pay tax on time for businesses and individuals alike.

Why HMRC Rates Matter: consequences beyond interest

Charging more interest is only one side of the coin. Penalties also stack up if you miss deadlines. Under the Self-Assessment rules, HMRC imposes penalties of 5% of any unpaid tax after 30 days, another 5% at six months, and a further 5% after twelve months.

Late payment penalties differ for VAT, and the pending deployment of Making Tax Digital (MTD) for Income Tax promises further changes.

Regardless of the kind of tax, Income Tax, National Insurance, Capital Gains Tax, Corporation Tax, VAT – you are exposed to both interest charges and penalty risk.

How the Bank of England Base Rate influences HMRC interest

HMRC ties its late payment interest to the Bank of England (BoE) base rate. Whenever the base rate moves, HMRC’s interest charges follow. This mechanism ensures that delays in tax payments become more costly when overall interest rates in the economy are higher.

For example, when the base rate dropped to 4.00% in August 2025, HMRC responded by lowering its late payment interest to 8.00%. Conversely, when the base rate was higher, rates were steeper.

Why it pays to pay tax on time

Timely tax payment is no longer just a legal obligation; it also makes strong commercial sense. Paying on time avoids expensive interest that accrues daily. Even a few weeks late on a sizeable tax bill can mean hundreds or thousands of pounds extra. Increased rates make that cost steeper.

Avoiding penalties preserves business cash flow and reputation. Penalties for late payment are often fixed or proportional to the amount due, and those add up fast, especially when interest is already tacking on.

Being compliant reduces risk. HMRC has made it clear that the increase in late payment interest is not made without reason. The government has been under growing pressure to close the tax gap, the shortfall between the tax owed and the tax collected each year. By raising the cost of paying late, HMRC removes the perception that delaying tax is a cheap source of short-term credit. The higher rate is designed to act as a deterrent, encouraging individuals and businesses to prioritise their tax obligations.

This approach highlights the need for proactive planning, accurate forecasting, and early engagement with HMRC if payment difficulties are anticipated. Acting sooner, rather than later makes it possible to secure arrangements such as Time to Pay, which can protect both cash flow and reputation.

What to do if you can’t settle by the due date

If you know that paying a tax bill in full by the deadline will be difficult, it is always better to act early. HMRC may be able to offer you a Time to Pay (TTP) arrangement.  This allows taxpayers to spread the cost of their liability across instalments. To avoid penalties, this must be agreed before the first late payment charge applies, although interest will still accrue on the outstanding balance.

Careful cash flow management and planning is just as important. By forecasting upcoming tax obligations, setting aside funds in advance, and monitoring Bank of England base rate changes, you can anticipate fluctuations in HMRC’s late payment interest and plan accordingly.

Get in touch

At Rayner Essex, we understand that managing tax deadlines can be challenging, especially with HMRC’s rising late payment interest rates and strict penalty regime. Planning ahead is essential, but you do not have to navigate this alone. Our experienced team can help you prepare for tax liabilities, forecast cash flow, and engage with HMRC where needed.

Whether you are a business owner, landlord, or individual, our accounting solutions and tax services are designed to ensure you stay compliant while maximising efficiency. Taking early advice can make a significant difference, helping you avoid costly penalties and interest, and protecting your financial wellbeing.