HMRC late payment interest hits 8.5% amid tax compliance crackdown

HMRC’s commitment to raise interest rates on late tax payments, which apply from 6 April 2025, will add further financial pressure to some businesses and individuals. As of April 2025, interest on late payment of tax stands at 8.5%, a 1.5% increase on the previous rate, pushing them to their highest levels in decades. 

This shift reflects a directional change in HMRC’s approach, which previously were set at the Bank of England’s (BoE) base rate plus 2.5%. The interest is now calculated as base rate plus 4%. Conversely, the HMRC tax repayment rate (where HMRC refunds any overpayment) continues as base rate minus 1%, meaning it stays at 3.5%. 

As of April 2025, interest on any late payment of tax stands at 8.5%, a 1.5% increase on the previous rate, pushing them to their highest levels in decades. As outlined in the Chancellor’s 2025 Spring Statement announcements, there is going to be a Government clampdown on tax avoidance and evasion. Also, HMRC is under pressure to address the large amount of tax that is owed by taxpayers. As such, HMRC is taking stronger action to ensure taxes are paid fully and on time. This means individuals and businesses can expect more scrutiny - making careful tax planning and compliance critical.

When it comes to corporation tax, there is a slight difference to acknowledge for those businesses who pay via quarterly instalments. With effect from 6 April, the interest charged on underpaid quarterly corporation tax rose to 7% - a 1.5% jump versus February. With many already navigating a cost-of-living and cost-of-business crisis, this adds a further financial burden.

Effective cashflow management is now more important than ever. Businesses should ensure robust compliance procedures are in place, alongside tools such as a 13-week cashflow forecast, which can help identify potential payment issues early. This allows time for proactive action and expert guidance.

For individuals, the costs of paying income tax and capital gains tax late are also significant, as they can be hit with late payment penalties of 5% of the unpaid tax after 1 month, 6 months and 12 months of the tax due date. On top of late payment interest, for individuals who go 3 months or more overdue with filing their Self Assessment return, there is a possibility of further fixed and daily penalties to contend with. 

Looking ahead, the introduction of Making Tax Digital (MTD) for Income Tax will support HMRC with tracking tax affairs of landlords, the self-employed, and sole traders. From April 2026, those with qualifying income over £50,000 will be required to file quarterly updates and maintain digital records. More information on MTD for Income Tax can be found here, and we can support anyone impacted with their compliance requirements.

Following the introduction of MTD for VAT, businesses and individuals who are required to file VAT returns could also be hit with late payment interest, as well as late filing and late payment penalties. 

Anyone who is in a position where they can’t pay the tax owed may want to consider the possibility of agreeing a Time to Pay Arrangement (TTP)  with HMRC. Before doing so, seeking input at early stage from Insolvency and Restructuring specialists may help to assess the best solution to address the tax debt, and especially if businesses are struggling with other outstanding liabilities. If TPP is the preferred option, it’s critical to know finances as HMRC may ask for details of income and expenses to ensure that payment terms are realistic, and HMRC is likely to monitor the business to ensure it receives all of the tax due. 

In the 2023–2024 tax year, HMRC collected £843.4 billion in tax revenue; a rise of £29.4 billion (3.6%) compared to the previous year. This upward trend is expected to continue, following the Chancellor’s commitment (as set out in the 2025 Spring Statement) to close the tax gap and generate an additional £1 billion in revenue by 2029. As a result, HMRC is projected to reach record-breaking revenue levels in the coming years.

To support these efforts, 500 new HMRC compliance officers are being recruited, which is in addition to previous announcement of 5,000 compliance staff who are to be recruited during the course of this Parliament. These officers will lead targeted compliance campaigns, resulting in a significant rise in HMRC enquiries and investigations.

If you have any questions about the late payment interest hikes, or need advice on managing your tax requirements, please get in touch with a member of our tax team via the form below or contact your usual Azets advisor.

Additionally, our specialist Restructuring team can support any businesses with any financial difficulties. As ever, early advice is key.