By next April, those with unpaid tax debts to HMRC could pay 9% in interest
Freelancers and self-employed individuals across the UK face higher financial burdens as HM Revenue & Customs (HMRC) increases the interest rate on unpaid tax debts.
This measure, unveiled by Chancellor of the Exchequer Rachel Reeves in her first Budget, will generate an additional £200 million per year for HMRC by hiking interest payments on late tax, according to several reports. HMRC made £346m in interest from taxpayers who paid late or arranged a “Time to Pay” payment plan in the year to October 2023 – a record amount and more than double the £159m it made the year prior, according to IFA Magazine.
The move raises serious concerns about its impact on those already struggling financially.
In contrast, interest rates on repayments by HMRC to taxpayers will not change, remaining at Bank Rate minus one percentage point, with a minimum limit of 0.5%. Thus, while HMRC’s late payment interest rises sharply, taxpayers will see no improvement in the rates they receive when owed money.
The new interest rate explained
Starting 6 April 2025, interest on unpaid taxes will climb by 1.5 percentage points to Bank Rate plus 4 percentage points. The bank rate is currently at 5% (as of 4 November 2024), which means a total interest rate of 9% for late tax payments. This increase significantly overshadows the existing rate, which stands at Bank Rate plus 2.5 percentage points, or 7.5%.
In contrast, interest rates on repayments by HMRC to taxpayers will not change, remaining at Bank Rate minus one percentage point, with a minimum limit of 0.5%. Therefore, while HMRC’s late payment interest rises sharply, taxpayers will see no improvement in the rates they receive when owed money.
Impact on freelancers
Self-employed workers, including freelancers, who often face variable income streams and cash flow challenges, could be especially vulnerable. For instance, consider a freelance graphic designer who owes £10,000 in unpaid tax as of April 2025. Under the current system, the interest rate would be 7.5%, amounting to £750 in interest per year. With the new rate of 9%, however, they would owe £900 in interest annually—an increase of £150. This added burden could strain freelancers who are already navigating tight profit margins or delayed client payments.
Blatant “cash grab” and “punishment” say experts
Tax experts at accountancy Price Bailey have been vocal about the implications, according to IFA Magazine. Andrew Park, Tax Investigations Partner at Price Bailey, described the hike as a “double punishment,” citing that late payment penalties and other charges already impose significant costs on those unable to meet tax deadlines. “This is a worrying shift from charging enough to deny taxpayers an advantage in paying late to creating another punishment by the backdoor. It’s a blatant cash grab by the taxman and one which comes without any safeguards,” Park stated.
Park further emphasised that the vast majority of late tax payments come from individuals and businesses facing genuine financial distress, not those seeking to game the system. “If punitive interest rates discourage late payment, one would expect the amount HMRC rakes in from late payments to fall, but instead, they are forecasting a windfall,” he added.
The anticipated increase in revenue from these measures is significant, with estimates suggesting that HMRC could collect over half a billion pounds in late interest payments by the 2025/26 tax year. This projection comes against the backdrop of record collections in 2023, where HMRC made £346 million from late payment interest, more than doubling the £159 million recorded the previous year.
The impact of HMRC’s operational delays
The hike comes at a time when HMRC has faced criticism for long delays in its services. In January 2024, many callers to the self-assessment helpline reported waiting over 40 minutes to speak with an adviser, contributing to missed deadlines and subsequent late payments. These operational challenges have added fuel to arguments that the increased interest rates unfairly penalise taxpayers who may already face delays in getting assistance.
Strategies to manage increased interest payments
Freelancers and self-employed workers are encouraged to take proactive measures to avoid being caught out by the higher rates:
- Plan for tax payments early: Creating a detailed cash flow forecast that accounts for tax obligations can help individuals set aside the necessary funds in advance, reducing the risk of late payments. Setting up a standard order at your bank for a certain amount to be set aside for tax each month is not always easy in the cost of living crisis but it will mean less stress come tax season.
- Explore payment plans: If facing financial difficulties, it’s advisable to contact HMRC early to arrange a Time to Pay payment plan, which spreads tax liabilities over a longer period.
- Stay informed: Keeping up to date with changes in HMRC policies and any assistance available for the self-employed can help taxpayers adapt more effectively.
- Consult financial advisors: Professional advice from accountants or tax advisors can provide tailored strategies to mitigate potential interest costs.
While the government’s objective to clamp down on tax avoidance and encourage timely payments is clear, the significant rise in late payment interest rates poses a challenge for many freelancers and self-employed workers.
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