Discrepancy between interest charged on late payments and that issued on tax rebates means tax office pockets the difference
Following the announcement by the Bank of England that its base interest rate has been cut by 0.25 percentage points, HMRC has signalled that it will reduce the interest rate it charges on late payments and repayment of taxes, too.
The change will take effect from Monday 12 August for quarterly instalment payments, and Tuesday 20 August for non-quarterly instalment payments.
HMRC sets the interest rate it charges on late tax payments as the Bank of England rate, plus 2.5%. This means that, from next week, the charge on late payments will fall from 7.75% to 7.5%.
While the move to lower interest rates will be welcomed, HMRC continues to charge higher interest rates on late tax payments and repayments than it applies to tax rebates that it issues.
Its ‘repayment rate’ is the amount of interest that HMRC applies when issuing tax rebates or refunds, and is set at the Bank of England rate, minus 1%. From next week, this will fall from 4.25% to 4%.
Self-employed at a disadvantage
In real terms, this 3% differential means the tax office earns additional tax revenue as a result of charging interest, while taxpayers who are eligible for rebates or refunds do not receive an adequate level of interest on funds that have been held.
The self-employed are disproportionately affected by these interest rates, as they apply to late tax payments – primarily those made by self-assessment. Permanent employees have their taxes deducted at source via the Pay As You Earn (PAYE) system.
HMRC estimated that it would receive 12.1m self-assessment tax returns ahead of the January 2024 self-assessment deadline. According to HMRC’s annual report for 2023/24, 90.5% of these were submitted on time – meaning around 1m taxpayers were caught by late payment penalties and interest rates.
The issue became more prominent during the UK’s ‘cost of living crisis’, as the Bank of England repeatedly raised its interest rate in a bid to control inflation.
Speaking about HMRC increasing its interest rates last year, Julia Kermode – former CEO of the Freelancer and Contractor Services Association (FCSA) – described the move as “unbelievably unfair” and accused the tax authority of “profiteering from self-employed workers at the worst possible time”.
“We need to put the period of high inflation firmly behind us”
Following the decision to cut the Bank of England base rate, the governor, Andrew Bailey, explained why the Bank had taken its decision.
“Higher interest rates work by reducing demand for goods and services in the economy. This helps slow the rate of inflation”, he explained.
“Nevertheless, inflation is likely to rise to around 2.75% in the second half of the year, as household energy prices provide less of a drag on inflation than they have done in recent months. But we expect this to be only a temporary rise, with inflation falling back to around our target afterwards”, Bailey added.
“We need to put the period of high inflation firmly behind us. And we need to be careful not to cut rates too much or too quickly”, he added. “The best contribution the Bank can make to support economic growth and people’s prosperity is by making sure we have low and stable inflation”.
Is it true that ‘payments on account’ are demand and these receive interest charged if in arrears?
I’m not sure that payment on account could ever be in arrears….