What Is Late Payment Interest?

Late payment interest is the quiet charge that many people overlook because it is not labelled a "penalty". HMRC does not need to send a fine or make a decision - interest simply accrues, daily, on any tax that sits unpaid past its deadline. With the rate now pegged at the base rate plus 4 points, that meter ticks at 7.75% a year, which makes paying HMRC late one of the more expensive forms of borrowing available.

How the Rate Is Set

HMRC's late payment interest is not a fixed figure - it tracks the Bank of England base rate. The formula was made harsher from 6 April 2025: interest is now charged at base rate plus 4 percentage points, up from the previous base rate plus 2.5 points. With the base rate at 3.75%, the late payment interest rate has been 7.75% since 9 January 2026.

Because it follows the base rate, the rate can change mid-year. HMRC recalculates automatically whenever the Monetary Policy Committee moves rates, so the interest on a long-overdue bill may be computed in several slices at different rates.

Late payment surcharge

A separate percentage penalty (5% of the unpaid balancing payment at 30 days, six months and twelve months) charged on top of daily interest. Surcharges can sometimes be appealed; interest generally cannot.

A Worked Example for 2026/27

Take Daniel, a self-employed plumber. His 2024/25 balancing payment of £5,000 was due on 31 January 2026, but cash flow was tight and he paid it on 2 May 2026, 91 days late. The rate was 7.75% throughout.

On top of that interest, because the balancing payment was more than 30 days late, Daniel also faces a 5% late-payment surcharge of £250 - a separate charge from the late filing penalty regime. The two together turn a 91-day delay into about £347 of extra cost. Estimate your own exposure with the late filing and payment calculator.

What Interest Applies To

Interest is even-handed: it applies to balancing payments, to late payments on account, to amended returns that increase your liability, and to penalties themselves once they fall overdue. It is calculated on a simple daily basis on the outstanding amount, so part-paying a bill reduces the balance on which future interest is charged. HMRC also pays repayment interest the other way - at a lower rate (base rate minus 1%, with a 0.5% floor) - when it owes you money for too long.

“Interest is not a punishment you can argue your way out of - it is simply the price of holding on to HMRC's money. At base plus 4 points it is dearer than many overdrafts, so paying tax late to fund the business rarely makes financial sense.”

Interest Versus Penalties

The key distinction is that interest compensates and penalties punish. A reasonable excuse can persuade HMRC to cancel a penalty, but interest reflects the simple fact that the money arrived late, so it stands even where the lateness was blameless. That is why, if you genuinely cannot pay on time, arranging a Time to Pay plan helps mainly by avoiding surcharges - interest typically continues to accrue across the instalment period regardless.

Related terms

• Late filing penalty - the separate charge for filing your return late.
• Payments on account - advance payments that also attract interest if paid late.
• Late filing and payment calculator - model the interest and penalties on a late bill.

People also ask

Can I appeal HMRC late payment interest?

Rarely. Because interest compensates HMRC for being paid late rather than punishing you, a reasonable excuse does not usually remove it. The main exceptions are where the interest was charged in error, or where an official HMRC mistake or unreasonable delay caused the lateness.

Is HMRC late payment interest tax deductible?

For Income Tax and Self Assessment, no - interest on late personal tax is not an allowable business expense. The rules differ for some company taxes, so a sole trader paying their Self Assessment bill late cannot deduct the interest against their trading profits.

Does interest keep building if I agree a Time to Pay plan?

Generally yes. A Time to Pay arrangement spreads the payments and can stop further late-payment surcharges from accruing, but daily interest usually continues to run on the outstanding balance until the debt is cleared. The earlier you pay down the balance, the less interest you accrue.