The Media Interest in Interest Charges

In recent days, the media has drawn attention to the increase in the rates of interest charged by HMRC. It is true that the rate of interest on late paid tax of 6% from 6 January is at a high. However, this is a function of the rates being linked to the base rate so the increases – and where relevant decreases – happen automatically.

The rate on late paid tax is not tax deductible but the rate paid by HMRC on repayments is tax free. The published rate of 2.5% paid on repayments due is, therefore, the equivalent of 4.1% for a higher rate (40%) taxpayer. These rates are intended to simply make a ‘commercial’ level of recompense for the use of the money and not create a windfall for either party. For Income Tax and Capital Gains Tax we recommend that wherever possible the correct amount of tax is paid at the due date to prevent any interest charges applying.

However, there are some less obvious consequences of the increases to bear in mind. If, for example, you are paying Inheritance Tax in instalments for a trust or the Estate of a deceased person, then you will have an unexpected cost which you will need to factor in your budgets. We can help you consider if there is an alternative way to deal with any outstanding IHT liabilities.

Another area where HMRC interest rates are on point is if you have a cheap loan (or similar benefit) from your employer or certain trusts. In this case, the taxable benefit is calculated by reference to the ‘official rate’ of interest.  HMRC publishes this rate at the beginning of each tax year and while interim changes were common in the 1990s, there have been only annual updates in recent times. We assume there will be an increase for 2023/24 and we will need to keep an eye on the lag between the Official Rate and Base rate. It is not uncommon for the terms of a loan to set the rate of interest payable as equivalent to the Official Rate of interest, so it will be important to make sure the correct sums are paid to avoid any unexpected tax charges for an insufficient payment of loan interest.

If you have any questions about this article, please contact your usual Mercer & Hole contact or a member of our private client tax team and we will be happy to talk through in more detail.