Historically, the interest rate charged by HM Revenue & Customs on tax repayments has been set at 1.5 percentage points below the Bank of England base rate.

When the Bank of England’s Monetary Policy Committee voted to reduce the Bank of England base rate to 1.5% in January, the interest on tax repayments fell to the lowest possible rate of 0% and has stayed at that level ever since.

Now, HMRC has announced that a new minimum interest rate of 0.5% is to be set on tax repayments, so that interest will still be payable even when the Bank of England base rate falls below 1.5%.

The Government announced in Budget 2009 that it would introduce secondary legislation designed to harmonise interest rates for those taxes where HMRC currently charge and pay interest. These regulations came into effect on 22 July 2009 and introduce changes to the way that HMRC calculates its interest rates.

HMRC will recalculate its rates after the September Monetary Policy Meeting (MPC) using the new formulae provided in the regulations. Harmonisation will result in a change to some of HMRC’s interest rates even if there is no change in the base rate announced by the MPC.

The harmonised rates will be based around the Bank of England base rate and will change in response to any changes announced by the Bank of England’s Monetary Policy Committee 13 working days later.

Interest charged on late payments of tax will be the Bank of England base rate plus 2.5 percentage points and for interest paid on overpayments, the rate will be the Bank of England base rate minus 1 percentage point.