A new tax change could provide financial relief to thousands of households. HMRC has reduced the interest on late payments from today, potentially lowering tax bills for many.
Interest on unpaid taxes is tied to the Bank of England Base Rate. Since 2020, the Bank of England increased the Base Rate 14 times, raising the interest on unpaid taxes from 2.6 percent in April 2020 to 7.75 percent by August 2023.
Following the Bank’s recent cut to five percent—its first reduction in four years—HMRC has lowered its interest rate on unpaid taxes by 0.25 percent to 7.5 percent.
This change is expected to provide a wave of relief to those struggling with their bills.
HMRC charges interest on late tax payments and penalties to compensate for the delay. This interest aims to place the taxpayer and HMRC in a similar financial position as if the tax had been paid on time.
Interest is charged from the due date until the payment date and is applied automatically.
A Freedom of Information request by AJ Bell revealed that nearly 1.4 million people faced interest on late payments for self-assessment, and 280,000 individuals were fined for late filing in 2021/22.
Some paid both, with 90,000 taxpayers hit with late filing penalties and interest.
Laura Suter, director of personal finance at AJ Bell, said: “As the Government drags more people into paying tax via self-assessment, we’ll see more and more taxpayers hit by these penalties.
“With the tax-free allowance on capital gains and dividend taxes being dramatically cut in the past two years, more people will have to file a tax return for the first time in their lives. Clearly some people are going to struggle to complete the return, or may not even realise they have to file one in the first place. You only have to look at the number of people calling HMRC and the volume of those that go unanswered to see the struggles that lots of taxpayers have.”
Ms Suter noted that taxpayers can get their fees and charges waived, but only if they meet a certain list of excuses from the taxman. She continued: “Simply not knowing that you needed to file a return or not understanding how to are not enough, you only get a refund if you have things like illness or a relative’s death that prevented you from filing, or your computer breaking when you were sending your return.”
Ms Suter said that setting regular calendar reminders can help avoid late filing by prompting individuals to file on time and allowing them ample time to gather necessary information and prepare their return.
She suggested another “alternative” to outsource it to a professional. Ms Suter said: “It’s very possible to file a return yourself, especially if it’s just to report an investment gain, for example, but you might decide that delegating it to an accountant or tax specialist is worth the cost.”
How late tax filing fees work
Individuals face a penalty if they miss the deadline for submitting a tax return or paying their bills. A late filing penalty of £100 applies if the tax return is up to three months overdue.
If the return is later or if the tax bill is paid late, the penalty increases. Additionally, interest will be charged on late payments.
According to AJ Bell, taxpayers are currently paying £350 in fines each for late filing on average.
