HMRC Interest Rates: Late Payments, Repayments, and Penalties

HMRC interest rates currently sit at 7.75% for late payments and 2.75% for repayments, effective from 9 January 2026.¹ Both figures are tied to the Bank of England base rate: late payment interest is the base rate plus 4%, and repayment interest is the base rate minus 1%, with a floor of 0.5%. With the base rate at 3.75%, the arithmetic produces those two headline numbers.² The rates apply to Self Assessment, PAYE, VAT, Capital Gains Tax, and most other common taxes covered by sections 101 and 102 of the Finance Act 2009.³

Interest is not a penalty. It compensates the public purse for money held past its due date, and it applies automatically regardless of why the payment is late.

How HMRC Sets the Rates

The margin above base rate for late payments went up from 2.5% to 4% on 6 April 2025, which was the single biggest change to HMRC interest rates in years.¹ Whenever the Monetary Policy Committee moves the base rate, HMRC recalculates its interest figures under the Taxes (Interest Rate) Regulations 1989. New rates typically take effect within a few weeks of the announcement.

The gap between the 7.75% late payment rate and the 2.75% repayment rate is deliberate. HMRC’s position is that the higher late payment rate creates a strong incentive to pay on time, while the lower repayment rate stops taxpayers profiting from overpaying and collecting interest back. The 0.5% floor on repayment interest exists because the base rate dropped to 0.1% during the pandemic, and without a floor taxpayers would have received almost nothing on overpaid tax.

One detail that catches people off guard: HMRC charges simple interest, not compound interest. Interest does not accrue on interest already charged.⁴ That is a meaningful difference from a credit card. On a large balance held over several years, the gap between simple and compound interest can be substantial.

When Interest Starts and Stops

Interest begins on the date the tax becomes due and payable, not the day after.⁵ If your Self Assessment balance is due on 31 January, interest starts accruing on 31 January itself. This applies even if the due date falls on a weekend or bank holiday.³

Interest continues to run until the full balance is cleared. A partial payment stops interest only on the portion you have paid. If you owe £5,000 and pay £3,000, interest keeps building on the remaining £2,000. Interest is also charged on unpaid penalties, because penalties are separate amounts due to HMRC and fall under the same rules. Interest itself does not attract further interest.⁴

Entering a Time to Pay arrangement does not pause interest. If you negotiate an instalment plan to spread the debt, interest keeps building on the outstanding balance throughout the payment period. You cannot set up a Time to Pay arrangement until you have submitted the relevant tax return. Even so, HMRC’s interest rate is often lower than what a commercial lender would charge on equivalent unsecured debt, so a Time to Pay plan can still be the least expensive option if you cannot pay in full.

For repayments, interest generally runs from the later of two dates: the date the tax was originally due, or the date the overpayment actually occurred. Repayment interest counts as taxable income, so if you receive a large refund with accrued interest, the interest portion goes on your next tax return.

Rates That Differ From the Standard 7.75%

A handful of taxes sit outside the standard formula or carry their own published rates.

Corporation Tax

Corporation Tax is explicitly excluded from section 101 of the Finance Act 2009 and runs under its own interest regime.³ The rate on underpaid quarterly instalment payments is 6.25% as of 29 December 2025.¹

Inheritance Tax

Inheritance Tax has its own published rates that track closely with the standard figures. From 9 January 2026, late payment interest on IHT is 7.75% and repayment interest is 2.75%.⁶ IHT is generally due six months after the end of the month in which the person died. Executors often underestimate how quickly interest accumulates while they wait for property sales or grant of probate. Where an estate includes property that takes time to sell, executors can sometimes arrange to pay IHT in annual instalments, but interest still applies to the deferred amounts.

VAT Repayments

For VAT accounting periods starting on or after 1 January 2023, the old repayment supplement was replaced by repayment interest, which uses the same base-rate-minus-1% formula with the 0.5% floor.⁷ A few VAT-specific conditions can delay or reduce that interest:

If you have any outstanding VAT returns, repayment interest on a refund will not start until HMRC receives the last overdue return.
HMRC will not pay interest where the overpayment was a simple mistake, such as paying £1,000 instead of £100.
If HMRC has requested a VAT security and you have not paid it, repayment interest is suspended from the date of that notice until the security is settled.

Repayment interest on VAT ends when HMRC either refunds the amount or sets it off against another tax debt you owe.⁷

Penalties Come on Top of Interest

Interest and penalties are two different charges, and you can be hit with both at the same time. For Self Assessment, HMRC applies a 5% surcharge on unpaid tax at three intervals: 30 days, 6 months, and 12 months past the due date.⁸ Interest runs on top of those penalties from the moment they are charged.

A different penalty regime applies under Making Tax Digital for Income Tax:⁹

Up to 15 days late: no penalty.
16 to 30 days late: 3% of the tax owed at day 15. In the first year of the system, this does not apply if you pay within 30 days or set up a payment plan.
31 days or more late: a further 3% of the amount owed at day 30, plus an ongoing daily charge at an annualised rate of 10% on the outstanding balance from day 31 until payment is made, for up to two years.

Can You Challenge an Interest Charge?

If the interest charge is legally correct, HMRC is entitled to recover it in full. There is no automatic right to have interest reduced or waived, and financial hardship or a misunderstanding of the rules is not enough.¹⁰ The one situation where interest can be reduced or cancelled is when HMRC itself caused the delay through an error or unreasonable processing time.

Objections are handled by the Interest Review Unit, but you cannot contact the IRU directly. Objections go to the local office that manages your tax affairs, in writing or by phone, and HMRC will not normally consider a case until the underlying tax has been paid and the interest has been formally charged.¹⁰ To succeed, you need to show that an HMRC error or delay financially disadvantaged you by creating an interest charge that would not otherwise have existed. Dated letters, call reference numbers, and digital submission receipts all count as evidence.

If internal review does not resolve the issue, you can appeal to the First-tier Tribunal. You generally have 30 days from the date on your decision letter to file an appeal.¹¹ Late appeals are possible but require you to explain the delay, and a judge decides whether to accept it. Appeals can be submitted online or by post using form T240.

Most interest challenges fail because the charge is technically correct even when the circumstances feel unfair. Where challenges tend to succeed is when there is a clear paper trail showing HMRC sat on information it already had, gave incorrect written advice, or took an unreasonably long time to process something. If your case does not fit one of those categories, paying the interest and focusing on avoiding the next one is usually the better strategy.

1
GOV.UK. HMRC Interest Rates for Late and Early Payments
2
Bank of England. Interest Rates and Bank Rate
3
legislation.gov.uk. Finance Act 2009 – Section 101
4
GOV.UK. Compliance Handbook – CH140260 – Simple Interest, Not Compound
5
GOV.UK. Compliance Handbook – CH140190 – Interest Start and End Dates
6
GOV.UK. Inheritance Tax Thresholds and Interest Rates
7
GOV.UK. Repayment Interest on VAT Credits or Overpayments
8
GOV.UK. Self Assessment Tax Returns – Penalties
9
GOV.UK. Penalties for Making Tax Digital for Income Tax
10
GOV.UK. Debt Management and Banking Manual – DMBM405020 – Interest Review Unit: Overview
11
GOV.UK. Appeal to the Tax Tribunal