HMRC late payment interest does not compound — it accrues as a straightforward daily charge on the unpaid tax amount

When you owe HMRC tax and miss the payment important date, the department charges interest on the outstanding balance from the due date forward. This interest is calculated as a percentage of what you owe, added daily, but each day's charge is based on the original unpaid amount, not on previously accrued interest. This is called straightforward interest, and it means your debt does not grow exponentially the way compound interest would.

The rate HMRC uses changes quarterly and is set by statute. As of early 2024, the rate sits at 8% per annum for most taxpayers, though this varies depending on the type of debt and when the interest period began. The interest runs from the original due date until you pay in full, regardless of whether you have made partial payments or entered a payment arrangement.

Key Takeaways

  • HMRC charges straightforward interest on late tax payments, meaning interest accrues daily on the original unpaid amount without compounding.
  • The interest rate is set by statute and changes quarterly; you can find the current rate on the HMRC website or in your notice of assessment.
  • Interest runs from the original due date until full payment, even if you have made partial payments or agreed a payment plan.
  • You can request interest relief in limited circumstances, such as if HMRC caused unreasonable delay or if you have genuine hardship.

How the daily interest calculation works

HMRC calculates interest by taking your unpaid tax amount, multiplying it by the annual interest rate, and dividing by 365 to get a daily charge. That daily amount is then multiplied by the number of days the debt remains outstanding. If you owe £5,000 and the rate is 8% per annum, the daily interest is roughly £1.10. After 30 days, you would owe approximately £33 in interest on top of the original £5,000.

The key point is that this £33 does not then generate its own interest. The next day's charge is still based on the £5,000 principal, not on £5,033. This is why straightforward interest is far less costly than compound interest over time. If the same debt compounded daily, the total would be noticeably higher after several months or years.

The interest rate and how it changes

HMRC's interest rate is linked to the Bank of England base rate plus 2.5 percentage points. The rate is set quarterly on 1 February, 1 May, 1 August, and 1 November. When the base rate moves, your interest rate on new late payments changes on the next quarterly date, but interest already accrued at the old rate does not recalculate.

You can find the current rate by checking your notice of assessment, your HMRC online account, or by calling HMRC directly. The rate applies to all unpaid tax from the due date forward, including income tax, corporation tax, VAT, and other taxes. Different rules explore to penalties, which are separate charges and do not accrue interest in the same way.

What happens if you pay in instalments

If you enter a payment arrangement with HMRC and pay in instalments, interest continues to run on the unpaid balance until the full amount is cleared. Each payment you make reduces the principal, which in turn reduces the daily interest charge going forward. However, you do not get credit for interest already accrued — that remains due as part of the debt.

For example, if you owe £10,000 and agree to pay £1,000 per month, interest will accrue on £10,000 in month one, on £9,000 in month two, and so on. The interest does not disappear or reset when you make a payment. This is why settling the debt sooner rather than later reduces the total amount you ultimately pay.

Interest relief and when you might request it

HMRC has discretion to reduce or waive interest in specific circumstances. You can request relief if HMRC caused unreasonable delay in processing your return or payment, if you relied on incorrect information from HMRC, or if you face genuine hardship. Relief is not automatic and depends on the facts of your case.

To request interest relief, write to HMRC explaining the circumstances and providing supporting evidence. Include your tax reference number and details of the debt in question. HMRC will review your request and respond in writing. There is no set timeline, but responses typically arrive within 4 to 8 weeks. Requesting relief does not stop interest accruing while your request is being considered, so the sooner you submit it, the better.

How interest differs from penalties

HMRC charges both interest and penalties on late payments, and they are separate. Interest is the cost of borrowing money from HMRC; penalties are charges for breaking the rules. Penalties do not accrue interest themselves, but interest continues to run on the underlying tax debt. If you owe £5,000 in tax plus a £500 penalty, interest accrues on the full £5,500, but the penalty itself does not generate additional interest.

Penalties vary depending on how late you are and whether the delay was careless or deliberate. Interest, by contrast, is automatic and applies to all late payments regardless of reason. Understanding the difference matters because you might be able to appeal a penalty but not the interest itself, though you can request relief from interest as described above.

Frequently Asked Questions

If I pay part of what I owe, does interest stop on the amount I paid?

No. Interest continues to run on the remaining unpaid balance until you clear the entire debt. Partial payments reduce the principal and therefore reduce the daily interest charge going forward, but they do not stop interest on the amount still outstanding.

Can I negotiate the interest rate with HMRC?

No. The interest rate is set by statute and applies to all taxpayers equally. You cannot negotiate a lower rate, but you can request relief from interest if circumstances warrant it, such as if HMRC caused unreasonable delay or if you face hardship.

What if I disagree with the interest amount HMRC has charged?

Check your notice of assessment or HMRC statement to verify the calculation. If you believe the amount is wrong, contact HMRC with your tax reference number and ask them to review it. If you still disagree after their review, you can appeal through the tax tribunal, though you must do so within the time limit set out in HMRC's response.

Does interest stop accruing if I enter a payment plan?

No. Interest continues to accrue on the unpaid balance throughout the payment plan period. Each payment you make reduces the principal and therefore the daily interest charge, but interest does not pause or stop until the full debt is paid.