HMRC has cut late payment fees for the over one million people who missed this year's self-assessment tax deadline. From February 17, the interest rate on late payments for taxpayers with outstanding tax debts with HMRC will drop from 7.25% to 7%. The move follows the Bank of England's decision to lower its base interest rate from 4.75% to 4.5%. The tax office calculates late payment interest as the base rate plus 2.5%.
According to official estimates, 1.1 million people missed this year's self-assessment deadline on January 31. However, even though the cut will be good for taxpayers, experts say the difference between what HMRC charges on late payments and pay on refunds is "deeply unfair." Currently, the tax office pays 3.5% interest on tax refunds, which is calculated as the base rate minus 1%. Defending the level, an HMRC spokesperson said: "The difference between rates is in line with the policy of other tax authorities worldwide. It compares favourably with commercial practice for interest charged on loans or overdrafts and interest paid on deposits.”.
Andy Wood, a tax expert from Tax Natives, said that in the "grand scheme of things", the cut to interest rates charged on late payments was "hardly significant". He added: "The real issue is that taxpayers still pay double the interest on late payments compared to what HMRC pays them in refunds. That’s a fundamental imbalance.”. For taxpayers who have yet to file their tax return, the penalties are already stacking up. HMRC applies a £100 fine if a return is up to three months late. This applies even if there is no tax to pay or if the tax due is paid on time. After three months, additional daily penalties of £10 per day are added, up to a maximum of £900.
After six months, a further penalty of 5% of the tax due or £300 is then added - whichever is greater. After 12 months, another 5% or £300 charge is added. There are also additional penalties for paying late of 5% of the tax unpaid at 30 days, six months and 12 months. The 7% interest rate is charged on the on the amount owed, in addition to the penalties. Andy warns that unpaid tax debt carries additional risks beyond interest, adding: "Beyond financial penalties, the longer a tax bill remains unpaid, the greater the risk of HMRC scrutiny. Late payments can flag taxpayers for further investigation, which can be time-consuming and costly.”.
Taxpayers who still need to file their returns or settle their tax bills should do so as soon as possible to avoid unnecessary interest and penalties. Even with the cut, Andy says the best course of action is to pay off any outstanding debt as soon as possible. He said: "While the interest rate drop provides a small benefit, penalties and potential investigations mean delaying further isn’t worth the risk.”.
You normally need to file a self-assessment tax return if you're self-employed and your income hasn't had tax automatically deducted, or if you've earned extra cash outside of your normal employment that has not been taxed. You can also check online through the HMRC website to see if you need to send a tax return. Get our money-saving tips and top offers direct to your inbox with the Mirror Money newsletter.
