HMRC charges VAT late payment interest at the Bank of England base rate plus 4%, which works out to 7.75% a year based on the March 2026 base rate of 3.75%. Interest starts on the first day your payment is overdue and keeps accruing daily until the debt is cleared. It sits alongside a separate penalty regime that took effect for VAT periods starting on or after 1 January 2023.
How the Rate Is Set
The charge comes from Section 101 of the Finance Act 2009, which provides that any amount payable to HMRC carries interest from the date it becomes due until the date of payment.1legislation.gov.uk. Finance Act 2009, Section 101 The rate is a formula: Bank of England base rate plus a fixed margin of 4%.2GOV.UK. Late payment interest if you do not pay VAT or penalties on time
Because the base rate moves with monetary policy, your cost of being late moves with it. At a 3.75% base rate, you pay 7.75%. If the base rate rose to 5%, the charge would be 9%. HMRC publishes the current figure on GOV.UK after each Bank of England decision.3GOV.UK. HMRC interest rates for late and early payments
Interest does not compound. Section 101(8) of the Finance Act 2009 states that late payment interest is not payable on late payment interest.1legislation.gov.uk. Finance Act 2009, Section 101 Daily charges add up, but you never pay interest on accumulated interest.
How the Daily Charge Is Calculated
Multiply the amount owed by the interest rate, multiply by the number of days late, then divide by 365. Interest runs from the first day your payment is overdue through to the day you pay in full.2GOV.UK. Late payment interest if you do not pay VAT or penalties on time
Say you owe £10,000 and pay 30 days late at 7.75%:
£10,000 × 7.75% × 30 ÷ 365 = £63.70
The numbers scale quickly. A £50,000 balance left 90 days at the same rate produces roughly £956 in interest. Every extra day adds to the total, and slower payment methods can tack on days if funds do not clear promptly. Paying part of the debt early cuts the principal the interest runs on, which lowers each day’s charge going forward.
If the Bank of England changes the base rate while your debt is outstanding, HMRC splits the calculation at each change and applies the rate that was in force during each segment.
Which VAT Amounts Attract Interest
Interest applies to any VAT paid late. HMRC’s guidance identifies four main triggers:2GOV.UK. Late payment interest if you do not pay VAT or penalties on time
- VAT return balances filed on time but not paid by the deadline. Interest runs on the full outstanding sum from the day after it was due.
- HMRC assessments where a check or audit reveals underpayment. Interest runs from the date the tax should originally have been paid, not from the date of the assessment.
- Amendments and corrections to earlier returns. Interest runs from the original due date of the period being corrected, whether you spotted the error or HMRC did.
- Missed payments on account for larger businesses required to make interim VAT payments. Interest runs from the date each instalment was due.
Unpaid penalties attract interest too. If a late payment penalty or late submission penalty goes unpaid, interest starts on that balance at the same base-rate-plus-4% rate.2GOV.UK. Late payment interest if you do not pay VAT or penalties on time Ignoring a penalty notice quietly inflates what you owe.
How Interest Sits Alongside Penalties
Interest and penalties are separate charges that run in parallel. The penalty regime that replaced the old default surcharge on 1 January 2023 uses a tiered structure based on how many days your payment is overdue.4GOV.UK. Penalties for failure to pay VAT on time from 1 January 2023 – Overview
- Days 1 to 15: no penalty. This grace period lets you pay or agree a Time to Pay arrangement without triggering a penalty.5GOV.UK. How late payment penalties work if you pay VAT late
- Day 16: a first late payment penalty of 2% of the VAT still outstanding at day 15. If the balance is still owed at day 30, HMRC adds another 2% of what remained at that point.
- Day 31 onwards: a second late payment penalty accrues daily at an annualised 4% on the outstanding balance until the debt is cleared.
Late payment interest runs across all of these days at the same time. A business paying 40 days late faces the first penalty (up to 4% of the original debt), 10 days of the second penalty running at 4% a year, and daily interest at base rate plus 4% across the whole 40 days. The charges layer, and the second penalty in particular can build without a separate notice for each day’s accrual.
Time to Pay Does Not Stop Interest
If you cannot pay in full, contacting HMRC to set up a Time to Pay (TTP) arrangement before day 15 can prevent late payment penalties from being assessed.5GOV.UK. How late payment penalties work if you pay VAT late That day-15 point is the deadline to know. After it, penalties start stacking even if you later agree a payment plan.
A TTP arrangement lets you pay in instalments over an agreed period. You can check eligibility and set one up online or by calling HMRC. You will need your VAT reference number, bank account details, and information about your income and spending. HMRC may expect you to reduce the debt as far as possible first, including by releasing assets like stock or investments, before agreeing to spread payments.6GOV.UK. If you cannot pay your tax bill on time – Setting up a payment plan
Here is the trap: late payment interest continues to accrue on the outstanding balance throughout a TTP.2GOV.UK. Late payment interest if you do not pay VAT or penalties on time A TTP prevents penalties, not interest. The longer the repayment period, the more interest builds. Front-loading payments within the arrangement lowers the running principal and cuts the total interest bill.
Can You Appeal the Interest?
Generally no. Penalties can be appealed within 30 days of being issued, on grounds such as a reasonable excuse.7GOV.UK. Appeal a penalty Interest is a statutory charge rather than a discretionary penalty, so HMRC has limited ability to waive it. If you successfully appeal an underlying assessment and the tax owed is reduced, the interest is recalculated on the lower figure, but the rate itself is not negotiable.
When HMRC Owes You
The system runs both ways, but not symmetrically. When HMRC owes you money because you overpaid VAT, they pay repayment interest at the Bank of England base rate minus 1%, with a floor of 0.5%.3GOV.UK. HMRC interest rates for late and early payments At a base rate of 3.75%, that is 2.75% received on overpayments against 7.75% paid on underpayments. There is no financial reward for overpaying VAT as a strategy, and a steep cost for underpaying.