HMRC repayment interest is the compensation HMRC pays you when it refunds tax you overpaid, covering the time the government held money that was not owed. From 9 January 2026 the rate is 2.75%, set at the Bank of England base rate minus one percentage point.1GOV.UK. Rates and Allowances: HMRC Interest Rates for Late and Early Payments The refund itself is your own money returning and is not taxable, but the interest element is treated as savings income and has to be declared.
Which Taxes Attract Repayment Interest
Section 102 of the Finance Act 2009 covers any amount HMRC is required to pay back under legislation, along with any overpayment it refunds.2Legislation.gov.uk. Finance Act 2009 – Section 102 In practice that means overpaid Income Tax, Capital Gains Tax, and the Class 2 and Class 4 National Insurance contributions self-employed taxpayers settle through Self Assessment. VAT refunds also earn repayment interest, though Schedule 54 sets special timing rules for VAT credits.
One boundary catches business owners out: Corporation Tax is excluded from Section 102 and runs on its own interest regime with different rates.3Legislation.gov.uk. Finance Act 2009 – Explanatory Notes – Section 102 If your refund is a company Corporation Tax refund, do not assume the 2.75% figure applies. More on that below.
How the Rate Is Set
The Treasury sets the rate by regulation under Section 103 of the Finance Act 2009, pegged to the Bank of England base rate.4Legislation.gov.uk. Finance Act 2009 – Section 103 The formula is base rate minus one percentage point. With the base rate at 3.75%, that gives 2.75% from 9 January 2026.
The rate HMRC charges on late payments is far higher. From 6 April 2025 late-payment interest is set at the base rate plus 4%, which puts the current late-payment rate at 7.75%.1GOV.UK. Rates and Allowances: HMRC Interest Rates for Late and Early Payments The five-point gap means deliberately overpaying tax as a savings strategy makes no sense.
When Interest Starts and Stops
The start date is not simply the day you paid. Schedule 54 of the Finance Act 2009 uses two dates: the day HMRC received your payment and the day the tax was legally due. Interest runs from whichever falls later.5Legislation.gov.uk. Finance Act 2009 – Schedule 54 Pay early, and you earn nothing for the pre-due-date period. Pay after the due date, and interest runs from the day HMRC received your money.
Late filing costs you interest too. Where a refund depends on a return or claim you submitted late, the start date shifts forward to the date you actually filed, not the date filing was originally due.5Legislation.gov.uk. Finance Act 2009 – Schedule 54 A Self Assessment return filed months late means months of forfeited interest.
Interest stops on the day HMRC issues the repayment or sets it off against another tax you owe. You do not have to claim it separately. HMRC calculates it from its own payment records and adds it to the refund.
Is HMRC Repayment Interest Taxable?
Yes. The interest element counts as savings income for the tax year you receive it, and HMRC expects it in your taxable income for that year.6GOV.UK. Compliance Handbook CH146040 Whether you actually pay tax on it depends on your Personal Savings Allowance:
- Basic-rate taxpayers get up to £1,000 of savings interest tax-free per year.
- Higher-rate taxpayers get up to £500.
- Additional-rate taxpayers get no Personal Savings Allowance.
HMRC repayment interest sits alongside bank interest, building society interest, and other savings income when you measure your allowance.7GOV.UK. Tax on Savings Interest: How Much Tax You Pay For a modest refund the interest is usually small enough to fall inside the allowance. If you already earn substantial savings interest elsewhere, even a small amount from HMRC can tip you over. You report it through Self Assessment, and leaving it off can trigger penalties.
Corporation Tax Is Different
Because Corporation Tax is outside Section 102, companies deal with a separate set of rates. Large companies paying by quarterly instalments earn 3.50% on overpaid instalments from 29 December 2025 and face 6.25% on underpaid instalments. Companies that do not pay by quarterly instalments but pay Corporation Tax early also earn 3.50%.1GOV.UK. Rates and Allowances: HMRC Interest Rates for Late and Early Payments For a company refund, check the quarterly instalment tables on GOV.UK rather than the general repayment rate.