The UK's tax authority is set to reduce the interest it charges on overdue payments, offering a slight reprieve for individuals and businesses behind on their tax bills.
Rate Change Follows Bank of England Move
HM Revenue & Customs (HMRC) has confirmed it will revise its interest rates following the Bank of England's decision to cut its base rate. On 18 December 2025, the Bank's Monetary Policy Committee reduced the rate from 4.00% to 3.75%.
As HMRC's interest rates are legally tied to the Bank of England base rate, this change triggers an automatic adjustment. The new rates are designed to reflect the broader economic environment while maintaining the system's fairness.
New Rates and Effective Dates
The revised rates will come into force on two key dates, depending on your payment schedule.
- For taxpayers making quarterly instalment payments, the change takes effect on 29 December 2025.
- For all non-quarterly instalment payments, the new rates will apply from 9 January 2026.
Under the new structure, the late payment interest rate will be the Bank of England base rate plus 4%. The repayment interest rate—what HMRC pays you if you have overpaid tax—is set at the base rate minus 1%, with a guaranteed minimum of 0.5%.
This means from 9 January 2026, the main rates will be:
- Late payment interest rate: 7.75% (3.75% + 4%)
- Repayment interest rate: 2.75% (3.75% - 1%)
Policy Rationale and Global Context
HMRC states that the differential between the late payment and repayment rates serves a clear purpose. The higher charge for late payers "encourages prompt payment and ensures fairness for those who pay their tax on time." Conversely, the repayment interest "fairly compensates taxpayers for loss of use of their money when they overpay."
The tax authority emphasises that this model is consistent with the approach taken by tax authorities worldwide. It also argues that the rates compare favourably to standard commercial practices for loans, overdrafts, and savings deposits.
Official information pages detailing the precise interest rates for all taxes and duties will be updated by HMRC shortly. Taxpayers are advised to check the government's website for the most current information relevant to their circumstances.
