The meter that starts ticking the moment a tax deadline passes — a daily charge pegged to the base rate that keeps running until HMRC has your money.
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 4.25 points, that meter ticks at well over 8% a year, which makes paying HMRC late one of the more expensive forms of borrowing available.
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 4.25 percentage points, up from the previous base rate plus 2.5 points. With a base rate around 4.25%, the effective late payment interest rate is roughly 8.5%.
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.
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 — about 90 days late. Assume an interest rate of 8.5% across the period.
| Item | Figure |
|---|---|
| Unpaid balancing payment | £5,000 |
| Days late (1 Feb to 2 May) | ~90 |
| Daily interest (£5,000 × 8.5% ÷ 365) | ~£1.16 |
| Interest charged (90 days) | ~£105 |
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 90-day delay into £355 of extra cost. Estimate your own exposure with the late filing and payment calculator.
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 4.25 points it is dearer than most overdrafts, so paying tax late to fund the business rarely makes financial sense.
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.
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