HMRC raked in millions in late payment interest in 2023-24 tax year as taxpayers missed due dates and faced harsh 4% upcharge on base rate.

The situation was exacerbated by HMRC’s decision to hike the late payment interest rate to 4% above the Bank of England base rate from 6 April 2025, meaning rates were as high as 8.25% for many months.

In total, HMRC charged 1.3 million taxpayers late payment interest in 2023-24 raising £137m in a single tax year, revealed a freedom of information request by AJ Bell. The average interest payment was just over £100. 

Late payment interest was hiked from 6 April 2025 to base rate plus 4%, when it had previously been base rate plus 2.5%, and interest accrues daily on the original amount owed, meaning the total quickly escalates.

But these figures are likely to increase as HMRC only counts taxpayers once the interest accrued or late filing penalty have been paid, meaning the figures for the 2023-24 tax year will likely be significantly higher than they are now. This is highlighted by the outturn of £200.1m for 2022-23, up on £194.1m in 2021-22.

Charlene Young, senior pensions and savings expert at AJ Bell, said: ‘These latest figures suggest that taxpayers still face difficulty navigating the UK’s complex tax system and HMRC are cashing in as a result. Millions have paid late payment interest in recent tax years, despite moves to relax the rules on who must file a self-assessment return.

‘Tax-free allowances for dividends have been repeatedly slashed since 2018, with the current allowance standing at just £500 compared to its original £5,000 level. The rates of income tax on dividends also went up in 2022 and will jump again for basic and higher rate taxpayers next tax year. It’s a similar story when it comes to profits on investments outside of ISAs and pensions, with a lower capital gains tax (CGT) allowance and recent hikes to the rates of tax due.

‘This perfect storm drags smaller investors into calculating and paying these taxes for the first time but also means bills for existing taxpayers have jumped. Taxpayers can become unstuck if they find the systems and deadlines difficult to navigate, and others potentially face higher interest and penalties when it comes to mistakes and not paying on time.’

Now concerns are growing that the imminent move to Making Tax Digital (MTD) for Income Tax for taxpayers – landlords, self employed and sole traders with qualifying income above £50,000 for tax year 2024-25 – will see the amount of late payment interest soar as around of third of affected individuals have very low awareness of the sweeping changes to tax reporting due from April 2026.

The increasing complexity of the tax system is inevitably leading to more errors and confusion for taxpayers while the government is hoping MTD will solve low-level mistakes and raise more income tax, with projections of an additional £780m by 2028-29, a position which is viewed with great scepticism.

Young said: ‘The government hopes the move to MTD for income tax self-assessment will close the tax gap, with quarterly reporting improving accuracy.

‘However, for landlords and small business owners this will undoubtedly create additional admin, and a new regime of penalty points to get to grips with. Partnerships and incorporated firms will be exempt from the initial income tax roll out, although many will already be under the MTD regime for VAT. 

‘While the changes may help HMRC to clamp down on unpaid tax, it remains to be seen how easily business owners are able to adapt, and whether HMRC will end up financially benefiting from low levels of engagement with the new system.’