HMRC’s new interest rate of 7.5% is the highest for 15 years. However, it is only obliged to pay 4% on money owed to the public. The Chartered Institute of Taxation has previously urged the Government to review this 'unfair' gap ...
HMRC's new late payment interest rate really is a cause for concern!
HM Revenue and Customs (HMRC) has come under fire for its decision to raise the interest rate on late tax payments to a 15-year high of 7.5%. The new rate, which is fixed at 2.5 percentage points above the Bank of England's rate, poses a significant burden on hundreds of thousands of taxpayers unable to pay their tax bills on time.
"This increase affects not only late payers, but also families grappling with inheritance tax!"
One notable disparity is that while HMRC charges an interest rate of 7.5% on money owed to them, they are only obligated to pay 4% on money owed to taxpayers. The sudden surge in the interest rate has taken many late-payers by surprise, particularly after years of experiencing relatively low interest rates on overdue tax payments. The rate HMRC charged on overdue tax as recently as January 2022 was a mere 2.75%.
Accountancy professionals have expressed concerns about the impact of this interest rate hike on struggling taxpayers. I believe the current rate could be a real shock to those who fail to make timely payments. With household budgets already stretched to breaking point and high street banks withholding interest rate increases from savers, this is not an opportune time for HMRC to benefit from taxpayers struggling to meet their tax obligations.
At the end of 2022, there were 730,617 taxpayers enrolled in Time to Pay arrangements, which allow taxpayers to repay their tax bills over an agreed-upon period, albeit with added interest. Failure to set up a Time to Pay arrangement or pay the tax bill on time may result in penalties for taxpayers.
In extreme cases, if a late payer has not engaged with HMRC, the tax office may levy up to half of their gross income through their tax code, potentially jeopardizing their ability to meet essential living costs.
"The rate hikes also have implications for families dealing with inheritance tax!"
Delays in obtaining a grant of probate, a legal document required to administer an estate, can cause families to miss the inheritance tax payment deadline. Inheritance tax, levied at 40%, must be settled within six months after the individual's death, or else interest is charged on the outstanding amount.
In some cases, the interest on the inheritance tax bill exceeds the yield from the property portfolio in the estate. The sudden increase in interest rates has caught numerous families off guard, as inheritance tax interest rates had not been a significant concern since 2008.
Of course, HMRC has defended their approach to tax debt and often emphasises its aim to provide support to those in need while taking action against customers who refuse to engage or pay their taxes.
"I'm really concerned about this increase in interest rates!"
It's just going to put more strain on both struggling households and bereaved families. The new interest rate has taken many in the accounting world by surprise, and I'd argue that it really is an inopportune time to raise them.
It really is a cause for concern.
Until next time ...
ROGER EDDOWES Business Godparent
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Roger trained at Edward Thomas Peirson & Sons in Market Harborough before working at Hartwell & Co, followed by Chancery, as a partner. He started Essendon Accounts and Tax with Helen Beaumont in 2014 as a general practitioner with a hands-on approach.
Roger loves getting his hands dirty, working with emerging, small-to-medium and family businesses to ensure they receive the best possible accountancy advice. Roger utilises an extensive network of business contacts to leverage the best guidance and practical solutions.
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