On 8 May 2025, the Bank of England reduced its base rate from 4.50% to 4.25%. In response, HM Revenue & Customs (HMRC) has announced corresponding changes to its interest rates for late payments and repayments.
Effective Dates and New Rates
The revised HMRC interest rates will apply from:
- 19 May 2025 – for quarterly corporation tax instalment payments
- 28 May 2025 – for most other tax payments
The updated interest rates are:
- Late Payment Interest Rate: 8.25% (base rate + 4%)
- Repayment Interest Rate: 3.25% (base rate – 1%, with a minimum floor of 0.5%)
These rates affect most UK taxes, including income tax, National Insurance, capital gains tax, stamp duty, and VAT.
What Does This Mean for Me? – A Guide for UK SMEs
For UK small and medium-sized enterprises (SMEs), this adjustment carries several implications:
Lower Penalties on Late Payments
If your business occasionally misses HMRC deadlines, the reduction in late payment interest eases the penalty burden slightly. While 8.25% is still high, any downward movement is welcome in tight cash flow conditions.
Reduced Incentive for Early Payments
The interest HMRC pays on tax overpayments is also lower, making early or excess payments less financially rewarding. SMEs should avoid overpaying and instead maintain working capital where possible.
Cash Flow Management Remains Critical
The differential between what HMRC charges (8.25%) and what it pays (3.25%) highlights the importance of timing. Businesses should aim to pay on time — not early, not late — to manage costs efficiently.
Financial Planning Considerations
SMEs should reassess cash flow forecasts and budgeting strategies to ensure tax payments are timed optimally and avoid unnecessary interest charges or the opportunity cost of tying up funds with HMRC.
While this is not a radical policy shift, even small rate changes can affect short-term planning. These updated interest rates reinforce the need for disciplined cash flow management and close attention to tax deadlines.
Author
Gill Laing is a qualified Legal Researcher & Analyst with niche specialisms in Law, Tax, Human Resources, Immigration & Employment Law.
Gill is a Multiple Business Owner and the Managing Director of Prof Services Limited - a Marketing & Content Agency for the Professional Services Sector.
