HMRC issues tax update after Bank of England interest rate decision

On May 8, the Bank of England Monetary Policy Committee announced a drop in the base rate from 4.50% to 4.25%. This base rate influences the interest rates for building societies and banks, affecting everyone from savers to homeowners and credit card holders.

However, it also has a lesser-known impact on HMRC bills. Following yesterday's announcement, the department confirmed that its own interest rates would be adjusted in line with the new base rate. This change will specifically affect individuals who are late in paying their taxes and consequently incur interest charges on their payments.

Those who have overpaid tax and are due repayments from HMRC will also see a decrease in the interest rates on these amounts. On May 19, the interest rates for quarterly instalment payments will fall. Non-quarterly instalment payments will only benefit from the new rates from May 28.

HMRC's interest rates on late payments and repayments currently sit at 8.5% and 3.5% respectively. By the end of the month, the interest rate on late payments will reduce to 8.25%, while the repayment interest rate will also decrease to 3.25%.

HMRC calculates the late payment interest rate as the base rate plus 4%. The repayment interest rate, on the other hand, is set at the base rate minus 1%, with a minimum of 0.5%.

The taxman stated: "The rate of late payment interest encourages prompt payment and ensures fairness for those who pay their tax on time, while the rate of repayment interest fairly compensates taxpayers for loss of use of their money when they overpay."

Late payment interest rates are currently at a record high as the last time it hit 8.5% was in February 2000.

The Bank of England's decision to cut the base rate by 0.25% came after the Office for Budget Responsibility forecast a peak 3.7% inflation later this year. This combined with the uncertainty in global markets following President Trump's slew of tariffs likely prompted the cut.

Kevin Mountford, co-founder of , explained: "The MPC is likely to prioritise economic support when it meets. A 25 basis point cut would be welcome news for borrowers and could help businesses offset the recent rise in National Insurance costs.

"For savers, however, a falling base rate typically spells bad news. That said, the UK savings market remains highly competitive, so while we can expect the most attractive offers to start edging down, there are still solid rates available, with one-year fixed accounts hovering around 4.5%."

Ben Thompson, deputy CEO of , offered his perspective on the mortgage landscape: "We now have real wage growth, lower mortgage rates, and a favourable rate outlook, plus a record high number of mortgage products overall. We're even seeing some helpful lending for first time buyers, and hopefully that continues to grow, enabling more renters to become homeowners."