Currently, over a million people have yet to file their most recent tax return. In addition, approximately 850,000 others have entered into a ‘Time to Pay’ arrangement with the taxman. For both of these groups, paying the tax they owe is about to get more expensive. Why? Because from 11th July 2023, HMRC interest rates rose for the fifth time this year to a staggering 7.5%!
Why are HMRC interest rates going up?
The main reason HMRC interest rates are going up is inflation. In an attempt to curb the fast rise in inflation, the Bank of England has been pushing up the UK’s most important interest rate, the Bank Rate. During December 2021, this went up from 0.1% to 0.25%. and after a number of rises this rate has now reached 5% in July 2023. Given that the Bank of England has still not really yet managed to halt inflation, it’s highly possible the Bank Rate will increase further still.
As the Bank Rate has increased, so too have HMRC interest rates.
On 6th January 2023 they were already risen to 6%. That became 6.5% on 21 February, 2023, 6.75% on 13th April 2023, 7.0% on 31 May 2023 and now (July 2023) stands at 7.5%.
The amounts paid on repayments have risen from 2.5% to 4% in the same timescale.
Will HMRC interest rates go up further?
The answer to this question is likely to be ‘yes’. The latest forecast (July 2023) by financial experts is that the Bank Rate is likely to increase to a peak of 5.75% this year. If this happens, the HMRC interest rate could well hit 8% or even above.
What about interest on overpaid tax?
If you overpay tax, HMRC will pay you interest on the extra amount. Currently, the rate HMRC pays has also finally risen from it’s historic lows and is now at 4%. Alas, rather like the banks, there is always a substantial margin between what HMRC charges and what it pays – just another way of extracting more money from taxpayers for the Treasury.
What should I do to stop my tax debt from rising?
If you haven’t yet submitted your most recent tax return, do it now. Even if you can’t pay the tax due, this will at least let you avoid a late payment penalty.
If you are on a Time to Pay arrangement, the only way to reduce the cost of the debt is to pay it off quicker. If your self-employed income rises faster than you expected, it may be wise to clear your tax bill sooner. Otherwise look to borrow from sources that charge interest at lower rates than the taxman.
As always, if you are a THP client and you’d like further advice on Self-Assessment or tax repayments, please speak to your account manager.
About Karen Jones
Having worked for one of the world’s largest accountancy firms, Karen Jones uses her tax knowledge and skills to help clients obtain substantial reductions to their tax liabilities.
With an expanding portfolio of tax clients, Karen enjoys the variety her work brings her and particularly likes working with new businesses and people. With a growing number of tax clients, she frequently faces a variety of challenges and relishes the experience she gains as she solves them.
Karen likes the THP ethos: “I like the way the team has a professional, but friendly and down-to-earth approach – it creates a productive atmosphere that benefits everyone.”
Karen’s specialist skills:
- Personal Taxation
- Tax Efficient Planning
- Trust Administration