Following the Bank of England’s quarter-point cut to the base rate on 7 August, HMRC has confirmed reductions to its late payment and repayment interest rates. However, the changes will not take effect until later in the month.
Most taxpayers’ late payment interest rate will fall from 8.25% to 8.0% from 27 August 2025. This remains historically high, although it is the first reduction since rates began climbing in 2021. HMRC’s repayment interest on overpaid tax will also fall, dropping from 3.25% to 3.0% from the same date. Quarterly instalment payments for corporation tax are subject to earlier adjustments.Â
From today (18 August), the interest rate charged on underpaid instalments will decrease from 6.75% to 6.5%. The interest paid on overpaid instalments will also reduce from 4.0% to 3.7%.
The changes follow recent reforms that gave HMRC greater flexibility in setting rates. Late payment interest is now pegged at the Bank of England base rate plus 4.0%, compared to plus 2.5% at the start of the 2025/26 tax year. Repayment interest is fixed at the base rate minus 1.0%, which HMRC notes is in line with other international tax authorities’ practices.
While the reductions provide some relief, taxpayers should note that late payment interest has remained unchanged for over two decades. Prompt payment of tax liabilities remains the most effective way to avoid these high costs.
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