HMRC late payment interest does not compound — it accrues as simple interest on the original unpaid amount

When you miss a tax payment deadline to HMRC, the interest calculation is straightforward: HMRC charges a fixed percentage rate on the amount you owe, calculated daily from the due date until you pay. The interest itself never earns interest. This matters because it means your debt grows more slowly than it would under a compounding system, but it still grows every single day the balance remains unpaid.

The rate HMRC charges changes quarterly and is set by statute. It is currently 8% per annum, though this varies depending on when your debt originated and whether Bank of England base rates have shifted. The interest accrues daily but is usually calculated and added to your account in chunks — often when HMRC sends you a formal demand or when you make a payment.

Understanding how this interest works matters because it affects how much you will owe if you cannot pay immediately, and it shapes whether paying in instalments or borrowing to settle quickly makes financial sense.

Key Takeaways

  • HMRC charges simple interest, not compound interest, so the interest amount grows at a fixed daily rate on the original debt only.
  • The current interest rate is 8% per annum, but this rate has varied historically and may change if base rates shift.
  • Interest accrues from the payment due date, not from the date HMRC issues a demand or notice.
  • The longer you delay payment, the more interest accumulates, so settling even a few weeks late costs noticeably more than paying on time.

How the daily interest calculation works

HMRC calculates interest by taking your unpaid tax amount, multiplying it by the annual interest rate (currently 8%), and dividing by 365 to get a daily charge. That daily amount is then multiplied by the number of days the debt remains outstanding. For example, if you owe £1,000 and miss the deadline by 30 days, the interest would be roughly £6.58 (£1,000 × 0.08 ÷ 365 × 30).

The key word here is "roughly" — HMRC's actual calculation may differ slightly depending on how they count the days and when they apply the interest to your account. Some debts accrue interest daily but are added to your balance only when you receive a formal notice or make a payment. Others may be calculated in batches. The effect is the same: you pay interest for every day you are late, but the amount does not multiply itself the way compound interest would.

If you pay part of the debt partway through the late period, HMRC recalculates the interest on the remaining balance from that point forward. This is where simple interest works in your favour compared to compound systems — paying even a small amount early reduces the total interest you will owe.

When interest starts and how long it runs

Interest begins on the day after the payment due date, not on the date you receive a bill or demand. For most self-assessment tax returns, the due date is 31 January following the tax year. For PAYE, corporation tax, and VAT, the due dates vary by tax type and payment method. If you pay by cheque, HMRC counts the payment as made on the day they receive it, not the day you post it — so mailing a cheque close to the deadline carries risk.

Interest continues to accrue until HMRC receives your payment in full. If you set up a payment plan or time-to-pay arrangement, interest may still accrue on the outstanding balance, though the arrangement itself stops HMRC from taking enforcement action. Some arrangements include a freeze on interest, but this is negotiated case-by-case and is not automatic.

Once you pay, interest stops accruing immediately. There is no grace period or final interest charge after payment clears.

How the interest rate is set and when it changes

HMRC's interest rate is set by statute and is linked to the Bank of England base rate plus 2.5 percentage points. The rate is reviewed quarterly in February, May, August, and November. When the base rate changes, HMRC's rate changes on the next review date — not immediately. This means if base rates rise sharply in January, you will not see the increase in HMRC interest until February.

Historically, HMRC interest has ranged from 2.5% (when base rates were near zero during the pandemic) to over 8%. The current 8% rate reflects the higher base rate environment as of 2024. If base rates fall, HMRC's rate will fall with them on the next review date, but any interest already accrued at the higher rate is not refunded or recalculated.

You can check the current HMRC interest rate on the HMRC website or by calling their helpline. The rate that applies to your debt is the rate in effect on the day your payment was due, not the rate when you eventually pay.

Why simple interest still costs you money

Although simple interest is less punitive than compound interest, it is not forgiving. A £5,000 tax debt paid 90 days late at 8% per annum costs roughly £98 in interest alone. Paid 180 days late, it costs roughly £197. The longer you wait, the more you owe, and there is no cap on how much interest can accrue.

This is why paying as soon as you can, even if you cannot pay the full amount, makes sense. Paying £2,000 of a £5,000 debt 60 days late costs less in total interest than paying the full £5,000 after 90 days. HMRC applies your payment to the oldest debt first, so partial payments do reduce the interest burden.

If you cannot pay by the due date, contact HMRC before the deadline to discuss a payment plan. A time-to-pay arrangement does not erase the interest, but it stops HMRC from pursuing enforcement action like a county court judgment or attachment of earnings, which would damage your credit and cost you more in the long run.

Interest versus penalties — they are separate charges

HMRC charges interest on late payments separately from penalties. If you miss a tax deadline, you may face both interest on the unpaid amount and a penalty for filing or paying late. The penalty is usually a percentage of the unpaid tax (typically 5% if you pay within 12 months of the deadline, rising to 10% after 12 months). Interest and penalties stack on top of each other.

Interest is automatic and unavoidable if you pay late. Penalties can sometimes be reduced or removed if you have a reasonable excuse — for example, if your accountant made an error or you were seriously ill. Interest cannot be waived or reduced, though HMRC may agree to freeze it if you enter a payment arrangement.

When calculating what you owe, add the original tax, the interest, and any penalties together. This total is what you must pay to clear the debt completely.

Frequently Asked Questions

Can HMRC charge interest on interest?

No. HMRC charges simple interest only on the original unpaid tax amount. The interest itself does not accrue interest, no matter how long the debt remains outstanding. However, if you miss a payment arrangement, HMRC may add a new interest charge on top of the existing one.

Does paying by bank transfer stop interest from accruing?

Interest stops accruing on the day HMRC receives the payment, regardless of how you send it. Bank transfers usually clear within one to two working days, so paying by transfer close to the deadline is safer than posting a cheque. If you pay after the due date, interest has already started accruing.

What happens to interest if I set up a payment plan?

Interest continues to accrue on the outstanding balance unless HMRC agrees to freeze it as part of the arrangement. Most time-to-pay deals do not include an interest freeze, but you can ask. The arrangement stops HMRC from taking enforcement action, which is the main benefit if you cannot pay in full immediately.

Is HMRC interest the same rate for all tax types?

Yes. HMRC uses the same interest rate for self-assessment, PAYE, corporation tax, VAT, and most other taxes. The rate is currently 8% per annum and applies from the due date until payment is received, regardless of which tax you owe.

Can I claim the interest as a business expense?

Interest paid to HMRC on late tax payments is generally not deductible as a business expense. It is a penalty for late payment, not a cost of doing business. However, if you borrowed money to pay the tax, the interest on that loan may be deductible depending on the circumstances and the type of business you run. Speak to an accountant about your specific situation.