The Bank of England’s decision to lower the base rate to 4.75 per cent has set the stage for adjustments to HM Revenue & Customs’ (HMRC’s) interest rates.
From 18 and 26 November 2024, these changes will apply to late payments and tax repayments, creating a timely opportunity for businesses and individuals to reassess their approach to tax compliance.
Key dates to note
For quarterly instalment payments, the new rates will take effect from 18 November 2024.
For non-quarterly instalment payments, the changes will apply from 26 November 2024.
Staying aware of these dates will help avoid unnecessary interest charges and manage tax obligations effectively.
Why HMRC interest rates change
HMRC’s interest rates are tied directly to the Bank of England base rate.
Late payment interest is calculated at the base rate plus 2.5 per cent, while repayment interest is set at the base rate minus one per cent, with a minimum of 0.5 per cent.
From 6 April 2025, late payment interest will rise to the base rate plus four per cent.
These rates are designed to encourage timely payments while compensating taxpayers for any overpayments they have made.
However, as base rates fluctuate, late payments can quickly become costly.
How to avoid late payment interest
The most effective way to avoid interest charges is to maintain control over your tax affairs.
Good bookkeeping is critical to this.
Outdated or incomplete records can lead to filing errors or missed deadlines, which in turn expose you to late payment interest.
Regularly review and reconcile your financial data to ensure accuracy.
Whether you are making quarterly instalment payments or meeting an annual deadline, marking payment deadlines in your calendar will help you stay on track.
Late payments can also arise from cash flow issues, so regular forecasting is a key tool.
Identifying potential shortfalls early allows you to adjust, such as setting aside reserves or negotiating payment terms with suppliers.
If meeting a deadline is proving difficult, consider arranging a payment plan with HMRC.
While interest will still apply, this option can help you avoid harsher penalties or enforcement action.
Technology can also simplify the process. Use accounting software or digital tax tools to automate reminders and manage your payments efficiently.
How to avoid tying up funds through overpayments
While repayment interest is available to compensate for overpayments, the rate is often lower than what you could earn through other savings or investments.
Double-checking your tax returns is an effective way to ensure accuracy and avoid overpaying.
Taking full advantage of tax reliefs and allowances is another way to reduce your liabilities and minimise the risk of overpayments.
Keep an eye on changes to legislation or your business circumstances, as these can affect the amount of tax you owe. Staying informed ensures that your payments are both accurate and efficient.
The benefits of proactive tax management
While the upcoming changes to HMRC’s interest rates might seem minor, they highlight the importance of staying on top of your tax responsibilities.
Late payments can quickly escalate, particularly as interest rates rise, while overpayments can unnecessarily restrict your cash flow.
Proactive tax management can save both time and money, giving you greater control over your financial situation.
Contact us today to ensure your tax affairs are in perfect order and avoid unnecessary stress or expense.
