Penalty interest rate increases for third time this year
HMRC’s late payment interest rate will rise following another increase in the Bank of England’s base rate. When does this take effect and do taxpayers need to take action?
In line with the increase in the Bank of England base rate, late tax payments will be subject to interest at a rate of 3.25% (currently 3%) per annum from 5 April 2022 (or from 28 March for payments that are made in quarterly instalments). Late payment interest accrues even where a time to pay arrangement has been set up.
This is the third time HMRC has increased late payment interest this year, because the rate is set at 2.5% above base rate. Unfortunately, the repayment interest rate remains 0.5%, being the minimum rate that can be applied. HMRC’s Official Rate of Interest, which is used to calculate the income tax charge on the employee benefit of interest free loans, will also remain unchanged at 2% for the 2022/23 tax year.
Unfortunately, the only way to avoid the increased rate is to ensure all outstanding amounts are paid before 5 April. Where an individual can't do this, try to pay as much as possible to minimise the tax debt liable to the increased rate. In our opinion, the interest rate is likely to rise several times this year, so this makes good sense in any case.
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