Currently, some 1.3 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 5th April, HMRC interest rates will rise for the third time this year.
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%. In February 2022, it further increased to 0.5%, while the following month it hit 0.75%. Given that the Bank of England expects inflation to reach 8% this spring, it’s highly likely the Bank Rate will increase further this year.
As the Bank Rate has increased, so too have HMRC interest rates. On 7th January 2022 the rate for late payment of taxes rose from 2.6% to 2.75%. On 21st February it increased again to 3%. From 5th April 2022, it will hit 3.25%.
This means anyone on a Time to Pay arrangement will see their repayments increase. People who haven’t yet submitted their tax return or paid the tax they owe will also be affected. In addition to late submission and late payment penalties, the interest accruing on their unpaid tax will make the debt grow faster.
Will HMRC interest rates go up further?
The answer to this question is likely to be ‘yes’. Many financial experts believe that the Bank Rate is likely to increase to at least 1.5% this year. If this happens, the HMRC interest rate could hit 4%.
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 been stuck at 0.5% since September 2009. This may seem unfair. However, HMRC defends this lower rate by saying that it won’t pay more interest than is available commercially. If they did, HMRC argues people would overpay tax on purpose to secure an advantageous rate of interest.
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, you are still allowed to set up a Time to Pay arrangement before 1st April 2022. This will at least let you avoid a late payment penalty.
If you already have 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.
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