27th February 2025
Under the radar of headline-grabbing measures in last year’s Autumn Budget, a significant change to interest rates on late-paid tax has been introduced, one that could have a major impact on self-assessment taxpayers, businesses, and those already struggling to meet their tax obligations.
From April 2025, the interest charged on late tax payments will rise by 1.5% to 8.75%, reflecting the Bank of England base rate plus 4%. This change is expected to generate an additional £1.1bn over five years, with nearly half of that revenue coming from income tax self-assessment taxpayers and the remainder from VAT and Corporation Tax.
A costly mistake – The impact of higher interest rates
For those who underpay their taxes, whether due to financial struggles, administrative errors, or misunderstandings of the tax system, this increase will make it even more expensive to settle their debts with HMRC. Unlike penalties for deliberate or careless errors, which can be appealed in cases of reasonable excuse, interest on late payments is not subject to appeal. If tax is owed, interest will accrue regardless of the reason for the delay.
Tax professionals have long argued for fairer penalty structures, particularly for low-income taxpayers who fall into late filing penalties despite not owing any tax. However, this latest move makes no such distinction, further exacerbating the financial pressure on those least able to pay.
Increased enforcement – more resources to chase debt
Alongside the interest rate hike, the government is significantly bolstering HMRC’s debt management efforts. An additional 1,800 debt recovery officers are being recruited to help recover an estimated £7bn over five years starting from 2025/26. This investment comes as HMRC continues to grapple with historic tax debt, which stood at a record £43bn at the end of the 2023/24 financial year.
While increased enforcement may encourage greater compliance, it also risks pushing struggling taxpayers further into financial difficulty. HMRC’s approach to debt collection has been criticised in the past, and with higher interest rates in play, those who fall behind could find themselves caught in a worsening spiral of debt.
A one-sided approach
HMRC maintains that interest on late tax payments is not a penalty but rather compensation for the loss of funds over time. However, with rates now rising to what many consider a punitive level, this justification is increasingly being questioned.
If the purpose of higher rates was to incentivise timely tax compliance, logic would suggest that the government would also increase the rate of interest paid on overpaid tax. Instead, this remains unchanged at 3.25% (Bank of England base rate minus 1%), reinforcing the perception that the change is primarily a revenue-raising measure rather than a balanced fiscal policy.
What can taxpayers do?
With these changes taking effect from April 2025, taxpayers—especially those who are self-employed or run small businesses—should take steps now to avoid falling into difficulty:
If you have concerns about how these changes may impact you or your business, get in touch with your usual tax adviser to discuss your options.
