Big gap between HMRC interest rate on late payments vs. refunds

Earlier this month, HMRC announced a reduction in the interest rate it charges on overdue tax payments following the Bank of England’s recent quarter-point base rate cut to 4.75%.

New HMRC interest rate on late payments

This change means that HMRC’s interest rate, calculated as the Bank of England base rate plus 2.5%, will decrease from 7.5% to 7.25% as of November 18th for new tax debts and for taxpayers making quarterly instalments.

The adjusted rate takes effect on November 26th for those on non-quarterly repayment schedules.

Self assessment deadline looms – make sure you meet the deadline.

However, although this may seem like good news for small business owners, with the January 31st self-assessment deadline not far away, it serves as a handy reminder to get your tax return in on time and pay any taxes you owe by that date.

After all, despite the 0.25% drop, 7.25% remains a very high rate of interest to pay on any overdue tax. Don’t forget that as well as late interest, you may also be charged a penalty if you miss the 31st January deadline.

HMRC pays a lower rate of interest on refunds

In what one tax advisory calls the ‘elephant in the room’, there is a sizeable gap between the interest rate HMRC pays on late payments and the amount of interest it pays out on tax refunds.

The refund interest rate has also been cut following the BoE adjustment – from 4% to 3.75%.

Therefore, there is a 3.5% gap between the amount HMRC charges taxpayers for paying late and the amount the tax authority pays back if a tax refund is made.

CEO of Qdos, Seb Maley, told us:

… the real talking point here – and the elephant in the room –  is the difference between the interest rate HMRC charges, and the one it offers on refunds. HMRC might well argue this approach is consistent with the other tax authorities around the world, but it does seem somewhat unfair – and the self-employed are disproportionately affected.

Common sense solution for small business owners

No business owner wants to pay 7.25% interest to anyone – the bank, investors, and especially not HMRC.

In this case, the common sense solution is to pay your tax on time and calculate it correctly.

Here are some steps from the ByteStart team to help you avoid paying your tax late.

Here are some practical tips for small business owners to help avoid HMRC late payment interest:

Make sure you know what your tax deadlines are

For most businesses, this means self-assessment, VAT, employment taxes and Corporation Tax.

Keep accurate records

This will make preparing your tax return much easier. Your accountant will be grateful (if you have one). If you use online accounting software (see below), this makes this task much simpler.

Set aside funds to pay your tax

Set up a business saver account and earn interest on any funds before they need to be handed over to HMRC. If you set up a free current account with Tide, you can open a savings account simultaneously and earn over 4.07% AER (variable) interest (Nov 24).

Use digital accounting software

These days, this is a no-brainer for small business owners. You can automate and track your tax liabilities, get timely alerts, and know your financial position at any time. We’ve used the excellent FreeAgent for over ten years at ByteStart.

Hire an accountant

A good accountant will ensure that your numbers add up, that you meet your deadlines, and that they might even save you some tax.

Set up an HMRC Direct Debit

Set up a direct debit to ensure your tax is automatically paid on time after submitting a tax return.

Get in touch with HMRC early if you have cash flow problems

If you are suffering cashflow problems and don’t think you can pay your tax bill, contact HMRC proactively. HMRC may allow a payment plan to help avoid or reduce late payment interest or penalties.