MILLIONS of taxpayers face extra charges for late payments after an interest rate hike came into effect this week.
HMRC has increased the late payment charge from 2.75% to 3% as of Monday, February 21.
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What is late payment interest?
If you miss owe HMRC cash, you’ll be charged interest on it, just as you would with a loan or credit card.
It applies to late payments on income tax, National Insurance Contributions, capital gains tax and stamp duty.
Anyone with outstanding tax payments will have to fork out more for missing the deadlines, as the rate has gone up an by 0.25 percentage points.
The interest rate is linked to the Bank of England base rate, which rose to 0.5% at the start of the month – its second increase to the base rate in just two months.
The interest rate on late payments that HMRC charges is base rate plus 2.5%.
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That means, a year ago when base rate was 0.1%, the late payment charge was 2.6%.
Now base rate has risen to 0.5%, interest of late payments has climbed to 3%.
Here’s how it could affect you:
Self-assessment tax returns
Self-employed workers usually have until January 31 to file their tax return – and if you miss the deadline you’re immediately slapped with a £100 fine.
However, the deadline was extended this year until February 28, meaning people have until midnight on Sunday to submit their return.
But, crucially, while you won’t have received the £100 fine for not filing by January 31, you will have started racking up interest on what you owe.
And because the late payment interest charge has gone up, many people might be surprised to find their owe more than expected.
Sarah Coles, senior personal finance analyst at Hargreaves Lansdown, said: “It’s a horrible change, because it hits anyone who has put off paying their tax return until the end of February.
“The taxman said it wouldn’t charge late penalties for people who submitted tax returns by February 28, but it will charge interest on the tax that’s due.”
Most workers have their tax paid through their employer, so they don’t have to worry about the outstanding income tax as it’s done automatically through PAYE.
But if you’re self-employed, you’re responsible for paying tax directly.
What else might I be charged a late payment fee for?
Capital gains tax and stamp duty are two other common examples of times you might end up owing the government money.
Stamp duty is payable when you purchase a property worth more than £250,000.
And capital gains tax is payable when you sell an asset at a profit, such as investments or collectibles such as artwork or vintage cars.
You also might be due to make a tax payment if you or your partner received child benefits in the past year but had an annual income of more than £50,000.
Other ways it could affect you are if you’ve earned more than £7,500 from renting out property, or other untaxed income, or expenses exceeding the amount.
If you’re late paying these bills, you’ll also start to accrue interest.
How to avoid late payment fees?
It sounds obvious, but the easiest way to avoid incurring any extra charges is to pay on time.
To pay your tax bill directly to HMRC you’ll need to be set up for self-assessment.
To do this you’ll need your unique taxpayer reference (UTR) and activation code from HMRC.
This can take a while to receive, so if it’s the first time you’re completing self-assessment, make sure you register online immediately and ask HMRC for advice.
You can use HMRC’s tax calculator to estimate your bill too.
You may need to enlist a financial adviser or solicitor to pay tax such as CGT or stamp duty.
If you are struggling to pay your bills you can contact HMRC directly to discuss support available.
They may suggest you pay what you owe in instalments instead. This is called a Time to Pay arrangement.
You can get in touch by ringing 0300 200 3822, but you’re advised to do it sooner rather than later.
Sarah said: “If you can’t afford to pay your tax, don’t put it off.
“You may be able to set up a time-to-pay arrangement, which while you will pay interest on any outstanding tax, you won’t pay any additional penalties.”
If you need help with tax, you can get advice from tax charities like TaxAid and Tax Help for Older People.
TaxAid advises that you keep copies of forms and correspondence sent to HMRC, and keep “proof of posting” which can help you avoid late penalties.
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