No. PAYE interest is not allowable for corporation tax. When HMRC charges your company interest for paying PAYE late, that interest cannot be deducted from your taxable profits. It sits in your accounts as a real cash cost, but for tax purposes it has to be added back in your corporation tax computation, so your company bears the full amount with no relief.
The Statutory Basis
Section 54 of the Corporation Tax Act 2009 allows a deduction only for expenses incurred “wholly and exclusively for the purposes of the trade.”1Legislation.gov.uk. Corporation Tax Act 2009, Section 54 Interest on overdue PAYE fails that test. The company did not incur it to generate revenue or keep trading. It incurred it because a statutory payment deadline was missed. HMRC’s Business Income Manual states the position directly: no deduction is allowed for interest on overdue tax, and HMRC penalties are unlikely to qualify as expenses incurred wholly and exclusively for trade purposes.2GOV.UK. Business Income Manual – BIM42520
The reason for the lateness does not change the answer. A payroll software glitch, a delayed bank transfer, or a simple oversight all lead to the same treatment. There is no exception for honest mistakes or short-term cash flow problems. If late tax interest were deductible, the state would effectively be subsidising delayed remittance of tax it was already owed.
Section 1303 of the same Act reinforces the point by listing specific categories of tax-related interest and penalties that cannot be deducted, from VAT and excise duties to stamp duty land tax and construction industry scheme deductions.3Legislation.gov.uk. Corporation Tax Act 2009, Section 1303 The consistent thread is that the cost of failing to pay any tax on time is never a business expense.
Why Commercial Loan Interest Is Different
Interest on a bank loan, overdraft, or other commercial borrowing is generally deductible. A loan taken to buy equipment, fund stock, or cover operating costs is money used to generate future revenue, so the interest passes the “wholly and exclusively” test.4GOV.UK. Business Income Manual – BIM37035 The company chose to borrow in order to trade, and the interest is the price of that capital.
Tax interest is the opposite. HMRC is not lending your company money to help it grow. The company is holding onto funds it was already required to remit. That distinction, between voluntary borrowing to trade and involuntary debt from missing a deadline, is why one type of interest reduces your tax bill and the other does not.
Late PAYE Penalties Get the Same Treatment
Interest is not the only non-deductible cost of paying PAYE late. Late payment penalties, which scale with the number of defaults in a tax year and rise further if the debt is still outstanding after six or twelve months, are also disallowed for corporation tax.2GOV.UK. Business Income Manual – BIM42520 The same applies to FPS late filing penalties. If your company has paid HMRC anything during the accounting period for being late, whether interest or penalty, treat it as non-deductible unless you have a specific reason to think otherwise.
One narrow point on penalties: HMRC will consider cancelling late payment penalties where you can show a reasonable excuse.5GOV.UK. Disagree With a Tax Decision or Penalty – Reasonable Excuses That does not extend to the interest. Even where a penalty is waived, interest continues to accrue on the outstanding tax until it is paid. There is no mechanism to waive it.
How to Handle It in Your CT600 Computation
The interest still appears in your accounts as a real expense. It hits finance costs in the profit and loss statement and reduces your reported net profit. The bookkeeping entry is straightforward: debit the interest expense account and credit bank or the HMRC liability.
The adjustment happens at the corporation tax computation stage. Non-deductible expenses, including HMRC interest and penalties, must be added back to your accounting profit to arrive at your taxable profit. That increases the figure on which corporation tax is calculated. HMRC’s CT computation format includes a specific addback category for penalties and fines. If you skip this step, you understate taxable profit and underpay corporation tax, which produces a fresh HMRC debt with its own interest running on it. Make sure your accountant or tax software flags any HMRC interest or penalty paid in the period for addback rather than letting it flow through as a deductible cost.
Time to Pay Does Not Change the Answer
If your company genuinely cannot pay its PAYE on time, a Time to Pay arrangement lets you spread the balance over an agreed period.6GOV.UK. If You Cannot Pay Your Tax Bill on Time It does not stop interest running. You will still pay interest on the outstanding balance for the duration of the plan, and that interest remains non-deductible for corporation tax. It can, in some cases, reduce or eliminate late payment penalties where the arrangement is set up proactively, but the interest cost is a gross cost. Build the full figure into your cash flow planning, not a post-tax version of it.
Late payment interest itself accrues daily from the date the payment was due until HMRC receives it, with no grace period. The rate is tied to the Bank of England base rate plus a fixed margin, which rose from 2.5 to 4 percentage points from 6 April 2025.7HM Revenue & Customs. HMRC Interest Rates for Late and Early Payments As of 9 January 2026 the late payment rate is 7.75%. Because none of that gets tax relief, the effective cost to the company is the headline rate, not a lower after-tax figure.
The Repayment Interest Asymmetry
The treatment runs one way. When your company overpays corporation tax or PAYE and HMRC issues a refund, HMRC pays repayment interest on the overpaid amount. As of January 2026 that rate is 2.75%, the Bank of England base rate minus 1%.7HM Revenue & Customs. HMRC Interest Rates for Late and Early Payments
That repayment interest is taxable income and must be included in your Company Tax Return.8GOV.UK. Get a Refund or Interest on Your Corporation Tax So interest you pay HMRC for being late gives you no relief, while interest HMRC pays you for overpaying is taxed. The practical takeaway is to aim for accurate, on-time payments. The return on an overpayment is modest and taxable; the cost of an underpayment is steep and gets no tax relief at all.