Paying your taxes early can be a wise financial decision if the funds are available, as HMRC will pay you interest.
HMRC interest rates are set in legislation that links them to the Bank of England base rate. There are two rates:
- The repayment interest, set at base rate minus 1%
- Late payment interest, set at base rate plus 2.5%
Tax repayment interest in summary
- The repayment interest rate compensates you fairly for the loss of the use of your money.
- To prevent you from using HMRC as an interest-generating service, they only pay interest on early payments of tax, not on overpayments.
- Interest received or paid on personal taxes isn’t taxable or tax-deductible, but it is on other taxes like Corporation Tax.
- The interest paid or charged will be credited to your tax account and usually repaid to your bank account.
- HMRC will not repay sums under £100 and will hold this as a credit towards your next tax payment.
- The repayment interest rate can help you earn some additional income in the form of interest that you might not be getting on your bank accounts.
For example, paying Corporation Tax early
Darren is a savvy associate dentist and learns HMRC will pay interest if he pays his Corporation Tax early.
Darren has a surplus of cash funds, not earning any interest. He decided to take advantage of the HMRC repayment interest.
The Corporation Tax his company pays is typically £15,000 a tax year. He asked his accountant to provide him with the payment reference and paid HMRC £15,000 on 1st October 2022, 11 months before his upcoming Corporation Tax was due on 1st September 2023.
When his accountant filed his tax return for the accounting period 30 November 2022 with HMRC in March 2023, the Corporation Tax due was £10,000. HMRC repaid the £5,000 overpayment straight away. There is no interest paid on the overpayment.
On the due date of 1 September 2023, HMRC credited and repaid £248.70 in interest, calculated as follows.
|Amount(s) paid before due date(s) (£)||From date||to||
No. of days
|Credit interest (£)|
Darren’s company will pay £47.23 Corporation Tax at 19% on the interest, leaving him with a net gain of £201.45.