The HMRC late payment interest rate is the Bank of England base rate plus 2.5%, charged daily on unpaid tax from the due date until the balance is cleared. It applies automatically to overdue VAT, PAYE, Corporation Tax and Self Assessment, and it keeps running even inside a Time to Pay arrangement.
For a director watching a balance grow, the mechanics matter more than the headline figure. This guide explains how the rate is set, which taxes it touches, how the daily calculation works, and where it genuinely can and cannot be reduced.
How HMRC sets its late payment interest rate
HMRC does not fix its own number. The late payment interest rate is set by statute as the Bank of England base rate plus a fixed margin of 2.5 percentage points. When the Bank of England changes base rate, HMRC's rate moves with it a short time later.
This is separate from HMRC's repayment interest rate, which is base rate minus 1%, subject to a minimum floor. The gap between the two — sometimes several percentage points — means it is always more expensive to owe HMRC money than it is rewarding to be owed a refund by them.
Because base rate can change several times a year, the exact percentage is not fixed for long. HMRC publishes the current and historic HMRC interest rates on gov.uk, and this is the only reliable place to check the figure applying on a specific date.
Which taxes late payment interest applies to
Late payment interest applies broadly across the main business and personal taxes, including:
- VAT — interest runs from the day after the payment deadline on the VAT return.
- PAYE and National Insurance — interest accrues on late monthly or quarterly payments.
- Corporation Tax — interest starts the day after the normal due date, which is often before the return itself is filed.
- Self Assessment — interest applies to unpaid balancing payments and payments on account.
Unlike penalties, interest is not a punishment for lateness — it is HMRC's way of recovering the time value of money it was owed. That is why it applies automatically, with no discretion, as soon as a payment is late. It sits alongside, not instead of, any separate late-payment penalty — see our guide on VAT Late Payment Penalties Explained for how the two interact on VAT specifically.
How interest is calculated day by day
HMRC calculates late payment interest on a simple daily basis, not compounding month to month. The calculation is broadly:
- Take the outstanding tax balance.
- Apply the annual HMRC interest rate, divided by 365 (or 366 in a leap year) to get a daily rate.
- Multiply by the number of days the balance remains unpaid.
- Recalculate automatically whenever the balance changes or the rate itself changes.
If part of the debt is paid off, interest on that portion stops from the payment date. If the rate changes partway through, HMRC applies each rate only for the days it was in force, effectively calculating in short blocks rather than one flat sum.
There is no fixed cap on how long interest can run — it continues for as long as tax remains unpaid, which is why balances left untouched for months can grow noticeably larger than the original figure.
Interest that continues during a Time to Pay
A common misunderstanding is that agreeing a Time to Pay arrangement — a formal instalment plan with HMRC — stops interest. It does not. Interest keeps accruing on the outstanding balance for the life of the arrangement, even while instalments are being paid on time.
What Time to Pay does change is the penalty position: agreeing a plan before enforcement action typically avoids further late-payment penalties and stops immediate collection activity, even though interest continues quietly in the background. For directors weighing up whether to negotiate a plan, our article on HMRC Time to Pay Arrangements Explained sets out how the process works and what HMRC expects.
In practice, this means the total cost of a Time to Pay arrangement is usually the original tax plus interest for the whole repayment period — worth factoring into any instalment offer rather than treating the monthly figure alone as the full cost.
Can HMRC interest ever be waived?
HMRC has very limited discretion to waive interest, and it is applied sparingly. Interest may sometimes be reduced or removed where:
- HMRC made an error that caused or extended the delay.
- The underlying tax charge itself is later found to be wrong or is successfully appealed.
- There was an official HMRC delay in processing a payment that was made on time.
Interest is not usually waived simply because a director found the tax difficult to pay, or because the company was in genuine financial distress. That situation is better addressed through a Time to Pay negotiation or, where debt has become unmanageable, a conversation with a regulated insolvency practitioner. If HMRC pressure has escalated toward enforcement, our guide Owe HMRC and Can't Pay? Your Options covers the practical routes open to a company in that position.
Frequently asked questions
Does the HMRC late payment interest rate change often?
It changes whenever the Bank of England base rate changes, since HMRC's rate is fixed by law as base rate plus 2.5%. There can be several changes in a year during periods when base rate is moving.
Is HMRC repayment interest the same rate as late payment interest?
No. Repayment interest, paid when HMRC owes you money, is calculated at base rate minus 1%, subject to a minimum. It is almost always lower than the late payment rate.
Can I estimate how much interest I owe?
You can approximate it by multiplying the outstanding balance by the current annual rate, dividing by 365, and multiplying by the number of overdue days — but HMRC's own statement or online account will show the precise figure, since rates and balances can change part-way through the period.
Does interest stop once I agree a payment plan?
No. Interest continues to accrue on the outstanding balance throughout a Time to Pay arrangement, even though further penalties are typically avoided.
Is late payment interest the same as a penalty?
No. Interest compensates HMRC for late payment and applies automatically; penalties are a separate, additional charge for missing deadlines and depend on the tax and how late the payment is.
This article is general information, not legal, financial or insolvency advice, and does not cover every circumstance. Directors should speak to a regulated specialist about their own position before deciding how to proceed.
If unpaid tax and accruing interest are becoming difficult to manage, Harbourfirst can introduce you to a regulated insolvency practitioner or solicitor to talk through your options — start an enquiry.