In October 2024 the chancellor of the exchequer, Rachel Reeves, delivered the first budget of the current Labour government. One of the less noted changes she announced was an increase in the interest rate on the late payment of taxes. The aim of this policy is to encourage the public to pay taxes on time, thereby avoiding any additional charges.[1] However, prompt payment is more difficult than it sounds and taxpayers can be penalised through no fault of their own.
Prior to the October 2024 budget, the interest rate on late tax payments was calculated as the Bank of England base rate plus 2.5 per cent.[2] Following the increase in the Bank of England base rate to a high of 5.25 per cent,[3] the interest rate for late tax payments peaked at 7.75 per cent in August 2023. This was reduced to 7.5 per cent in August 2024 after a cut in the base rate to five per cent.[4] Yet at the Autumn 2024 budget, the surcharge over base rate on late tax payments was increased from 2.5 per cent to four per cent.[5] By 2027-28, HM Treasury estimates this increase will raise £215 million a year more in tax receipts.[6] This could take the total raised by these interest rates to over half a billion pounds by 2025-26.[7]
While implementing an incentive to pay tax on time is understandable, it is not always possible for taxpayers to pay their taxes on time. The rise in late tax payment rates penalises those people further through no fault of their own. Illiquid asset heavy, cash light taxpayers, are particularly vulnerable to this change as it takes time to convert assets into a form which allows them to pay their tax in cash.
This note analyses how the rise in the late tax payment surcharge impacts those who cannot pay their tax within the allotted time. It focuses specifically on inheritance tax.
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Key findings
- The interest on unpaid tax is set to rise after the chancellor increased the surcharge from 2.5 per cent to four per cent. Following this rise and the Bank of England cutting the base rate to 4.75 per cent, the rate of interest on late tax payments is set to rise to 8.75 per cent as of 6 April 2025.[8]
- This would be a 1.25 percentage point rise in comparison to the previous rate of interest of 7.5 per cent in August 2024. This is despite the Bank of England base rate decreasing to 4.75 per cent from 5 per cent.[9]
- The interest payable on late tax payments in April 2020 was 2.6 per cent. This means that the estimated interest rate after the October 2024 budget will be 6.15 percentage points higher, a 237 per cent increase.
- The late payment of inheritance tax for assets worth £750,000 will cost £8,726 in interest and £100,000 in tax after a year of non-payment from April 2025.
- The late payment of inheritance tax for assets worth £2 million will cost £52,357 in interest and £600,000 in tax after a year of non-payment from April 2025.
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[1] HM Revenue & Customs, HMRC interest rates for late and early payments, 5 August 2024, www.gov.uk/government/publications/rates-and-allowances-hmrc-interest-rates-for-late-and-early-payments/rates-and-allowances-hmrc-interest-rates, (accessed 13 November 2024).
[2] Ibid.
[3] Bank of England, Interest rates and Bank Rate, 10 May 2024, www.bankofengland.co.uk/monetary-policy/the-interest-rate-bank-rate, (accessed 13 November 2024).
[4] HM Revenue & Customs, HMRC interest rates for late and early payments, 5 August 2024, www.gov.uk/government/publications/rates-and-allowances-hmrc-interest-rates-for-late-and-early-payments/rates-and-allowances-hmrc-interest-rates, (accessed 13 November 2024).
[5] HM Treasury, Autumn Budget 2024 Policy Costings, October 2024, p.16.
[6] Ibid.
[7] Russell, B., HMRC set to rake in over half a billion per year by hiking interest payments on late tax, IFA, 31 October 2024, ifamagazine.com/hmrc-set-to-rake-in-over-half-a-billion-per-year-by-hiking-interest-payments-on-late-tax/#:~:text=Announced%20in%20the%20Autumn%20Budget,effective%20from%206%20April%202025, (accessed 15 November 2024).
[8] This assumes no decrease in the base rate of interest set by the Bank of England.
[9] Bank of England, Bank Rate reduced to 4.75% - November 2024, 7 November 2024, www.bankofengland.co.uk/monetary-policy-summary-and-minutes/2024/november-2024, (accessed 18 November 2024).