The cost of paying tax late in the UK has increased again. HM Revenue and Customs (HMRC) has confirmed new late payment interest rates following changes linked to the Bank of England (BoE) base rate.
As of 9 January 2026, taxpayers who owe HMRC will face a 7.75% late payment interest rate, while repayment interest remains much lower. This widening gap makes late tax payments significantly more expensive for individuals and businesses.
This guide explains the new HMRC late payment interest rate, which taxes are affected, how interest is calculated, and what you can do to reduce the cost.
What Is the HMRC Late Payment Interest Rate in 2026?
HMRC interest rates are set in legislation and are directly linked to the Bank of England base rate.
Current HMRC Interest Rates (from 9 January 2026)
- Late payment interest: 7.75% per annum
- Repayment interest: 2.75% per annum
The late payment rate applies to most taxes from the day after the payment due date until the full balance is cleared. Interest is calculated daily, not monthly.
How HMRC Calculates Late Payment Interest
From 6 April 2025, the formula changed:
- Late payment interest = BoE base rate + 4%
- Repayment interest = BoE base rate − 1% (minimum floor of 0.5%)
This explains why interest charged by HMRC is now far higher than interest paid on refunds.
Which Taxes Are Affected by HMRC Late Payment Interest?
The 7.75% rate applies broadly across most UK taxes and duties.
Taxes Subject to 7.75% Late Payment Interest
- Income Tax
- National Insurance Contributions (NICs)
- Capital Gains Tax
- VAT (periods starting on or after 1 January 2023)
- Corporation Tax (standard pay and file)
- Stamp Duty Land Tax
- Stamp Duty and Stamp Duty Reserve Tax
- Alcohol Duty
- Inheritance Tax
- Estate Duty
- Judgement debt taxation matters
If a tax payment is late, interest starts accruing immediately after the due date.
Self Assessment and HMRC Late Payment Interest
For individuals filing Self Assessment:
- Any unpaid tax after 31 January begins accruing interest at 7.75%
- This applies to Income Tax, Class 4 NICs, and Capital Gains Tax included in the return
- Interest continues until the balance is fully paid
Even a short delay can add noticeable costs because interest is charged daily.
VAT and HMRC Late Payment Interest
Late VAT payments are also charged interest at 7.75%.
Important points:
- Interest is charged regardless of whether a return is filed
- VAT penalties may also apply on top of interest
- From April 2025, VAT penalties increased, making delays even more costly
A Time to Pay (TTP) arrangement can stop VAT penalties but does not stop interest.
Corporation Tax Interest Rates Explained
Most Corporation Tax late payments now attract 7.75% interest, but some categories have different rules.
Quarterly Instalment Payments (QIPs)
- Interest on underpaid QIPs is lower than standard late payment interest
- From 29 December 2025, the rate is 6.25%
- Still charged daily until corrected
Even though the rate is lower, long delays can still be expensive for companies.
HMRC Repayment Interest: Why It’s Much Lower
If HMRC owes you money, repayment interest is paid at 2.75% from 9 January 2026.
This lower rate:
- Includes a minimum floor of 0.5%
- Is designed to compensate for loss of use of money
- Is intentionally lower than late payment interest
HMRC states this difference is consistent with international tax policy and commercial practice.
Is HMRC Time to Pay Interest-Free? (Common Myth)
No. This is one of the most costly misunderstandings.
Myth vs Reality
Myth:
Once you agree to a Time to Pay plan, interest stops.
Reality:
- Time to Pay prevents late payment penalties
- Interest at 7.75% continues on the remaining balance
- Interest only stops when the debt is fully paid
TTP helps with cash flow, but it does not reduce interest costs.
How to Reduce HMRC Late Payment Interest (3 Practical Steps)
Because interest is charged daily, speed matters.
Step 1: Make a Partial Payment
Paying anything immediately reduces the principal.
- Interest is only charged on the remaining balance
- Even small payments help
Step 2: Set Up a Time to Pay Arrangement
- Avoids additional 5% late payment penalties
- Keeps enforcement action on hold
- Interest still applies, but penalties are avoided
Step 3: Compare Alternative Finance
HMRC’s rate is effectively a high-interest loan.
- Some personal or business loans may be cheaper
- Paying HMRC in full early can reduce long-term cost
Why HMRC Increased Late Payment Interest
HMRC states the increase is part of a wider strategy to:
- Encourage prompt payment
- Reduce the overall tax debt balance
- Align interest charges with current economic conditions
The Autumn Budget 2024 and Spring Statement 2025 also confirmed higher penalties alongside interest increases.
Key Takeaways on HMRC Late Payment Interest
- HMRC late payment interest is 7.75% from January 2026
- Interest is charged daily, not monthly
- Time to Pay does not stop interest
- VAT and MTD taxes face both higher interest and penalties
- Acting early is the best way to limit costs
