£137M paid in late payment interest by 1.3 million taxpayers

£137M paid in late payment interest by 1.3 million taxpayers

HMRC’s decision to hike the late payment interest rate to 4% above the Bank of England base rate from 6 April 2025, has meant that rates were as high as 8.25% for many months.

In total, HMRC charged 1.3 million taxpayers late payment interest in 2023-24 which raised 137m in a single tax year, with the average interest payment being just over £100. 

Late payment interest was increased from 6 April 2025 to base rate plus 4%, when it had previously been base rate plus 2.5%, and interest accrues daily on the original amount owed, meaning the total quickly escalated.

However, these figures are likely to increase as HMRC only counts taxpayers once the interest accrued or late filing penalty have been paid, meaning the figures for the 2023-24 tax year will likely be significantly higher than they are now. 

Concerns are now growing with the imminent move to Making Tax Digital (MTD) for Income Tax for taxpayers – landlords, self-employed and sole traders with qualifying income above £50,000 for tax year 2024-25 who will see the amount of late payment interest soar as around of third of affected individuals have very low awareness of the changes to tax reporting due from April 2026.

However, for landlords and small business owners this will undoubtedly create additional admin, and a new regime of penalty points to get to grips with. Partnerships and incorporated firms will be exempt from the initial income tax roll out, although many will already be under the MTD regime for VAT. 

While the changes may help HMRC to clamp down on unpaid tax, it remains to be seen how easily business owners are able to adapt, and whether HMRC will end up financially benefiting from low levels of engagement with the new system.