Is HMRC late payment interest
tax deductible?

No. Interest HMRC charges on late-paid Income Tax, Class 4 National Insurance or other taxes on your own profits is not deductible (GOV.UK), and neither are penalties. HMRC's late payment interest rate is the Bank of England base rate plus 4 percentage points from April 2025 (GOV.UK).

If you pay your tax bill late, HMRC charges interest from the due date until you pay. It is tempting to treat this as a finance cost, but it is interest on your personal tax liability, not on business borrowing, and the law specifically prevents a deduction. The cheapest route is to avoid it: set money aside and pay on time, or agree a payment plan.

Is HMRC late payment interest tax deductible?

The HMRC rule

Fines and penalty charges, including parking fines and fines for breaking the law, are not allowable. The rule comes from HMRC Business Income Manual BIM42515: fines, Pay your Self Assessment tax bill.

Income Tax and National Insurance on your profits are your personal liabilities, and interest and penalties on them are not business expenses; the tax legislation specifically prevents a deduction for interest on late-paid tax (expenses overview). HMRC publishes its late payment interest rates, set at base rate plus 4% from 6 April 2025 (HMRC interest rates).

When you can claim it

• Nothing: HMRC interest is not deductible.
• Interest on a business loan used to pay your tax bill is also not a business cost.
• A Time to Pay arrangement can spread tax, though interest still runs.
• Interest on genuine business borrowing remains allowable.

When you cannot

• Interest on late Self Assessment payments.
• Late payment and late filing penalties.
• Interest on late VAT or PAYE payments.
• Surcharges and penalty points fines under Making Tax Digital.

What to claim instead

Set aside a share of each payment you receive for tax, so you can pay on 31 January and 31 July. If you cannot pay, contact HMRC before the deadline about a payment plan; you may be able to set one up online for Self Assessment debts up to £30,000.

How to decide if you can claim it

1. Was it for the business? A cost is only allowable if you incur it wholly and exclusively for the business. If it also serves a personal purpose that cannot be separated, such as clothing that keeps you warm or a meal that keeps you going, HMRC disallows it.
2. Is part of it personal? Where a cost has a business part you can identify, such as the business calls on a phone bill or the business miles in a car, you claim that part and leave the rest out, on a reasonable basis you can explain.
3. Is it a running cost or something you keep? It is not a cost of running the business at all, so the accounting basis makes no difference: it never goes in your expenses, although it may have a relief of its own elsewhere on the return.
4. Is there a specific rule? For HMRC late payment interest, the deciding rule is fines and penalties: fines and penalty charges, including parking fines and fines for breaking the law, are not allowable.

Worked example: a late balancing payment

A sole trader pays a £4,000 balancing payment three months late and is charged about £80 of interest and a £200 late payment penalty. Neither the £80 nor the £200 can be deducted from his profits. His accountant's normal fees remain allowable.

Why it is not deductible

Your Income Tax and Class 4 National Insurance are charged on your profits; they are not costs of earning them. Interest on paying them late follows the same character, and the legislation specifically prevents a deduction for interest on late-paid tax. Penalties are punitive and never allowable.

How HMRC interest works

Interest runs from the day after the due date until the day you pay, at the current late payment rate, which moves with the Bank of England base rate. From 6 April 2025, the rate is base rate plus 4%. It applies to balancing payments and payments on account.

Penalties

Late payment penalties apply on top of interest. For Self Assessment, they have been 5% of unpaid tax at 30 days, six months and 12 months. Taxpayers within Making Tax Digital for Income Tax move to a newer system of late payment penalties and penalty points for late submissions. None of these penalties are deductible, and neither is any fixed penalty for a late return or late quarterly update.

Payment plans

If you cannot pay in full, you can often set up a Time to Pay arrangement online for Self Assessment debts up to £30,000, if you are within 60 days of the due date and have no other plans or debts. Interest still runs, but penalties can be avoided if the plan is agreed and kept.

Interest on overpaid tax

If you overpay and HMRC repays you with repayment interest, that interest is taxable income. It is not trading income; declare it as interest.

VAT and PAYE

Late payment interest and penalties on VAT and PAYE are also not deductible. If you employ people, paying PAYE late creates interest and penalties on your business side, but they remain non-deductible.

If you are a landlord

The same rule applies to landlords: interest and penalties on late-paid tax on rental profits are not allowable letting expenses.

Where it goes on your return and in MTD

It is not an allowable expense, so it does not reduce your profit. Where your bookkeeping shows it as a business payment, record it as drawings, or include it and add it back as a disallowable expense on the full self-employment pages.

A landlord cannot deduct it from rental income either, so it stays out of the property expense boxes.

If your turnover was under £90,000, you can use the short self-employment pages (SA103S), which ask for a single figure for total allowable expenses rather than a box-by-box breakdown, and the full pages let you give just a total in box 31 too. The category still matters for your own records and for Making Tax Digital, where each quarterly update uses the same categories unless you choose to send one consolidated figure.

The accounting basis changes when a cost counts. On the cash basis, the default for sole traders since 2024/25, it counts when you pay it; on traditional accounting, when you incur it, with things you keep claimed through capital allowances.

How much an allowable cost saves

An allowable expense does not come back to you in full: it reduces your profit, so it saves tax at your marginal rate. For a sole trader in England, Wales or Northern Ireland that is 26p in the pound at the basic rate (20% Income Tax plus 6% Class 4 National Insurance) and 42p at the higher rate. The sole trader tax calculator works out the figure for your own profit.

What £1,000 of allowable expense saves a sole trader in 2026/27

• Basic rate (20% + 6%)£260
• Higher rate (40% + 2%)£420
• Additional rate (45% + 2%)£470
• Allowance taper band (60% + 2%)£620

Records to keep

Keep HMRC statements and any payment plan agreement. None of these figures go into your business expenses.

If Making Tax Digital for Income Tax applies to you (qualifying income over £50,000 from April 2026, £30,000 from April 2027 and £20,000 from April 2028), the records must be digital, and each quarter's costs go into a quarterly update. Check your date with the MTD requirement checker.

Common mistakes

• Claiming HMRC interest as a finance cost.
• Claiming late payment or late filing penalties.
• Borrowing to pay tax and claiming the loan interest as a business cost.

Related expenses

This item sits in the interest on bank and other loans category, alongside business loan interest and mortgage capital repayments. The A to Z of expenses answers the same question for every other cost.

If you record your costs in TapTax, each one lands in the HMRC category it belongs to, with its receipt attached, so your quarterly updates and year-end return use the same figures.