On Thursday 7 November, the Bank of England base rate (Bank Rate) reduced from 5.00% to 4.75%. What does this mean for tax payments?
How late payment interest is determined and how will this change
HMRC interest rates are set in legislation and are linked to the Bank of England base rate. There are two rates:
- late payment interest, set at base rate plus 2.5%
- repayment interest, set at base rate minus 1%, with a lower limit of 0.5% (known as the ‘minimum floor’)
As a result, HMRC interest rates for late payment and repayment will reduce.
These changes will come into effect on:
- 18 November 2024 for quarterly instalment payments
- 26 November 2024 for non-quarterly instalments payments
It should be noted that, even where a ‘Time to Pay’ arrangement has been agreed with HMRC, late payment interest still applies from the normal payment due date until the debt is cleared.
Changes in the October 2024 Budget – from 6 April 2025
The Government have announced that the late payment interest rate charged by HMRC on unpaid tax liabilities will increase by 1.5 percentage points to the Bank Rate plus 4 percentage points. This measure will be effective from 6 April 2025. Based on the current base rate this would mean that interest on late payments would increase to 8.75% from next April.
The rate of repayment interest is not set to change.
This can be of particular significance to those who chose to pay an Inheritance Tax bill over 10 years via annual instalment. Although you will not pay any interest on the first instalment (unless you pay late), on each subsequent instalment you must pay interest on both of the following:
- the full outstanding tax balance
- the instalment itself, from the date it’s due to the date of payment (if it’s paid late)
If you choose to pay off the liability sooner, then interest only runs to the date the liability is cleared.
Therefore, some people may want to revisit their position and consider paying off the full tax and interest sooner than planned.
Future considerations
The Bank of England will be meeting again on 18 December and their next decision on the base rate will be announced on Thursday 19 December 2024. The Bank of England meet every six weeks, but in times of crisis may meet more frequently (with the Coronavirus pandemic being a good example of this). Therefore, there may be a few changes before 6 April 2025, when the change to legislation takes effect from, but it’s worth noting the increase in HMRC’s charges, particularly alongside the other changes announced in the October Budget.
If you want to discuss how these changes will impact you, do get in touch.
