Interest and tax payments

HMRC charges interest on underpayments of tax, and pays interest (repayment supplement) on overpayments. The rate of interest paid on overpaid tax is lower than the rate charged on underpayments, and interest rates are adjusted frequently in line with commercial interest rates.

Detailed calculation of interest and supplement are not shown on Statements of Account, so it is worth checking when these items are large.

Income tax and capital gains tax: self-assessment

Interest is charged on underpaid payments on account and balancing payments from the due date to the date of payment. Repayment supplement is paid from the date of overpayment to the date the repayment is issued. The interest or supplement is based on the final amount of tax and class 4 national insurance contributions, taking into account all later adjustments.

Interest is also payable on late-paid penalties and surcharges (but not on interest). The above rules ignored the temporary relaxation in relation to interest charges as a result of the COVID-19 pandemic in relation to the 31 July 2020 payment on account, which could be deferred until 31 January 2021.

Instalment payments are availbable to those who could not pay in full by 31 January 2021 through a Time to Pay arrangement online. Late payment penalties are charged when the tax remains unpaid for 30 days, 6 months and 12 months after the payment due dates.

Similarly, any VAT payments that could not be paid in full by 31 Martch 2021 can be deferred up to 21 June 2021 in equal instalments, interest freed or a varying numbering of instalments depending on when you joined the deferall scheme.

You can avoid being charged penalties or interest by either joining the new payment scheme by 21 June or paying your deferred VAT from before 31 March in full by 30 June.

For individual taxpayers interest charged by HMRC is not tax-deductible, but neither is interest paid by HMRC taxable income.

Corporation tax: self-assessment

Similar principles apply with regard to corporation tax in relation to late-paid tax. However, interest rates are not necessarily the same as those applying to income tax and capital gains tax. In addition, there are different rates of interest for companies required to make quarterly payments of corporation tax.

In contrast to the position with personal taxpayers, under corporation tax self-assessment interest charged is allowed against company profits and interest received is treated as taxable income.

Typical interest rates

For rates of interest on overpaid and unpaid tax prior to the above, please visit the HMRC website.