Late business tax payments: HMRC interest starts before some penalties do

Missing an HMRC payment deadline can create two different costs: interest for the time the money remains unpaid and, for some taxes, additional late-payment penalties. The rules are not identical across VAT, Corporation Tax and Self Assessment, so finance should identify the tax regime before estimating the cost of a delay.

HMRC's main late-payment interest rate is currently 7.75 percent from 9 January 2026

HMRC's current rates page says the late-payment interest rate for the main taxes and duties it covers is 7.75 percent from 9 January 2026, while the repayment-interest rate is 2.75 percent. The late rate can change when the Bank of England base rate changes, so businesses should check the live HMRC rate rather than hard-code one percentage into a long-term cash model.

For VAT, HMRC states that late-payment interest runs from the first day after the due date until the tax is paid in full and is calculated at Bank Rate plus 4 percentage points. This means a business can owe interest even during a period in which no separate late-payment penalty has yet arisen.

VAT can add a first penalty after day 15 and a daily second penalty from day 31

For VAT liabilities within the current regime, GOV.UK says there is no late-payment penalty if the amount is paid in full or an appropriate Time to Pay arrangement is agreed within the first 15 days. If payment remains overdue after day 15, the first penalty can apply.

For relevant periods after the 2025 rate increase, the first penalty is 3 percent of the amount outstanding at day 15. If tax is still outstanding at day 30, another 3 percent applies to the amount still unpaid at day 30. From day 31, a second penalty accrues daily at an annualised 10 percent rate on the outstanding balance, subject to the statutory rules and assessment period.

Corporation Tax late payment is subject to interest, but not the same VAT late-payment penalty table

Corporation Tax has its own filing and payment rules. HMRC's interest-rate page applies the current 7.75 percent late-payment rate to Corporation Tax pay-and-file liabilities. The company can therefore incur interest from late payment even though the VAT day-15 and day-30 penalty schedule is not the generic Corporation Tax penalty model.

Keep late filing separate as well. Filing the Company Tax Return late can create filing penalties even where the tax itself was paid on time. Conversely, paying Corporation Tax late can create interest even where the return was filed on time. Finance should track filing status and payment status as separate controls.

Making Tax Digital for Income Tax introduces a phased late-payment penalty regime for mandated taxpayers

From the 2026 to 2027 tax year, taxpayers entering Making Tax Digital for Income Tax move into the new late-payment regime for the relevant liabilities. HMRC says payments up to 15 days late carry no penalty. For 2026 to 2027, the first percentage is 3 percent at day 15 and another 3 percent at day 30, with a 10 percent annualised daily penalty from day 31 where applicable.

HMRC also gives a first-year easement under the new MTD penalty regime: in that first year, the taxpayer has 30 days from the payment due date to pay in full or contact HMRC to set up a payment plan before penalties start to apply. This is specific to the phased MTD regime and should not be copied blindly onto VAT or Corporation Tax.

A Time to Pay arrangement can reduce penalty exposure, but interest normally continues

HMRC's VAT guidance says agreeing Time to Pay within the relevant penalty window can prevent or stop late-payment penalties from increasing. Its broader Time to Pay guidance likewise encourages taxpayers to contact HMRC as soon as they know they cannot pay in full.

Interest is different. HMRC says late-payment interest continues on the outstanding balance during a Time to Pay arrangement until the tax is paid. A payment plan therefore solves an affordability and enforcement problem; it does not make the borrowing cost disappear. Include interest in the cash forecast rather than assuming the agreed instalments equal only the original tax debt.

Record tax, late-payment interest and penalties as separate ledger items

When HMRC charges interest or a penalty, reconcile the notice to the tax liability and bank payment separately. Do not simply add the extra amount to VAT, PAYE or Corporation Tax principal. The accounting and tax treatment of the extra cost can differ by item and entity.

HMRC's Corporation Tax manual states that Corporation Tax late-payment interest can be deductible as a non-trading loan-relationship debit for companies. Penalties generally require separate consideration and should not be assumed to receive the same treatment. Ask the accountant how each charge should be recorded rather than coding every HMRC debit to one generic "tax" expense.