As a business owner, staying on top of tax deadlines is essential to avoid costly penalties. If you miss your corporation tax payment deadlines, HMRC will charge interest on the outstanding amount, and the longer the payment is overdue, the more interest will accumulate. Let’s explore what you need to know about interest on late payment of corporation tax, including how it’s calculated and ways to avoid these penalties.
What is Interest on Late Filing of Corporation Tax?
Interest is charged on corporation tax payments that are late, insufficient, or missed entirely. HMRC imposes what is known as “late payment interest on corporation tax,” and it starts accumulating the day after the payment deadline. This interest is similar to the interest businesses charge on overdue invoices.
As of February 25, 2025, HMRC’s official interest rate for late payment of corporation tax is 7.0%.
How is the Interest Rate Determined?
The interest rate HMRC applies is linked to the Bank of England’s base rate, with a 2.5% markup added by HMRC. So, when the Bank of England adjusts its base rate, HMRC’s interest rate for late payments changes accordingly.
For the 2024/2025 tax year, the interest rate for late payments is set at the base rate plus 2.5%. In contrast, a repayment interest rate, which compensates those who overpay their taxes, will be set at 3.5% starting from February 25, 2025.
When is Corporation Tax Due?
The deadline for paying corporation tax depends on your company’s accounting period. Generally, your tax payment is due nine months and one day after the end of your accounting period. For example, if your accounting period ends on March 31, your corporation tax payment will be due by January 1 the following year.
Quarterly Instalment Payments (QIPS) for Larger Businesses
For companies with taxable profits exceeding £1.5 million, tax payments are not made in one lump sum but in quarterly instalments. These payments spread over four instalments throughout the accounting period, with the first payment due after six months and the remaining payments spaced out at three-month intervals.
Larger companies with profits over £20 million must start their payments even earlier, with the first instalment due in the third month of the accounting period.
Corporation Tax Late Payment Penalties
Failing to meet tax obligations, including VAT, NICs, capital gains tax, and PAYE, will result in late payment penalties. Even if you have no corporation tax to pay or have made a loss, you must file your tax return. If you miss the filing deadline three times in a row, your penalty increases to £500.
If your return is over six months late, HMRC may estimate your corporation tax bill, which can’t be appealed. You must pay this estimated amount but can later correct it by filing your return and paying the correct tax, including penalties and interest.
Here’s a breakdown of late payment penalties:
- 1 day late: £100
- 3 months late: Another £100
- 6 months late: 10% penalty on the unpaid tax
- 12 months late: Another 10% on the unpaid tax
If corporation tax remains unpaid, HMRC can file a winding-up petition, potentially leading to compulsory liquidation.
How Late Payments Can Lead to Insolvency
Repeated late tax payments can drive your company toward insolvency, meaning it may no longer be able to meet its financial obligations. A Company Voluntary Arrangement (CVA) can help restructure debts and avoid forced liquidation, but it’s important to stay proactive with your tax payments to avoid this situation.
Non-compliance with tax obligations may also raise concerns about financial misconduct, which is why it’s essential to prioritize paying your taxes on time and consider debt management options like Time to Pay (TTP) arrangements.
5 Tips to Avoid Late Tax Payments
To avoid penalties and keep your business on track, here are five tips for managing your corporation tax payments:
- Update your records regularly: Use cloud-based accounting software to track income and expenses throughout the year, not just at year-end.
- Work with a tax advisor: A corporate tax advisor can help ensure you’re aware of all tax deadlines and provide guidance on minimizing your tax liability.
- Set aside money for taxes: Create a separate tax savings account and include taxes in your business budget to avoid shortfalls.
- Conduct regular financial reviews: Stay on top of your finances and spot potential issues before they become problems.
- Contact HMRC early if necessary: If you anticipate difficulties with payment, reach out to HMRC as soon as possible to arrange a Time to Pay (TTP) agreement.
By planning ahead and staying organized, you can avoid late payments and ensure that your business remains compliant with HMRC requirements. Understanding the consequences of late payments and taking proactive steps to manage your tax obligations will help you maintain financial stability and avoid penalties.
