Penalties and interest: Interest rules
Two-way interest rules apply to all taxes and duties. If you overpay tax, we'll generally pay you interest from the day after the original due date for the relevant return period (within certain rules). If you underpay, you'll be charged interest from the day after the original due date for payment.
These rules are designed to:
- encourage you to pay the right amount of tax at the right time
- compensate you if you pay too much tax by paying you interest
- compensate the government if you pay too little tax by charging you interest.
The interest rates are set by government and are based on market rates, so they will vary over time.
Interest on underpayments is linked to the market rate for short-term borrowing. Interest on overpayments is linked to the market rate for short-term deposits.
How interest is calculated
Interest is calculated on a daily basis on the amount of overpaid or underpaid tax. Interest does not compound and is not included when calculating penalties.
Interest on tax underpayments is charged on the tax owing, which includes accumulated penalties and shortfall penalties.
For the current interest rates see Interest rules
Date published: 08 May 2006