Advanced Taxation (UK) · Corporation tax: the scope of corporation tax, including close companies and investment companies

Interest Rates, Late Payment and Related Tax Interest for ACCA ATX-UK

Updated 11 October 2026 · Fact-checked

HMRC charges interest on corporation tax paid late at 8.50% and pays interest on overpaid tax at 3.50%. Calculate tax × rate × time. A close company that lends to a participator pays a 33.75% charge on the loan, due nine months and one day after the period end, refunded when the loan is repaid.

Understand Interest Rates, Late Payment and Related Tax Interest

Corporation tax is normally due nine months and one day after the end of the accounting period. Large companies pay by quarterly instalments instead. If the company pays after the due date, HMRC charges interest from the due date until the day it pays. If the company pays too much, HMRC pays interest on the overpayment.

The ATX-UK tax tables give assumed rates: 8.50% on underpaid tax and 3.50% on overpaid tax. A third rate, the official rate of interest, is 3.75%. It is not a rate on tax debts. It is the rate used to measure the taxable benefit when someone gets a cheap or interest-free loan. Do not mix up the three rates.

The interest has its own tax effect for the company. Interest the company pays on late tax and interest it receives on overpaid tax are treated as non-trading loan relationship items. Interest received is taxable. Interest paid is deductible against profits. Check the wording of the question and state your treatment clearly.

A close company is controlled by five or fewer participators, or by its directors. Owners can be tempted to take money out as a loan to avoid dividend tax. To stop this, the law imposes a tax charge on the company when it lends to a participator (broadly, a shareholder or someone with a stake in the company) and the loan is still outstanding nine months and one day after the end of the accounting period in which it was made. The charge is at the dividend higher rate, 33.75% of the loan. It is not a corporation tax on profits. It is a separate charge, and the company pays it to HMRC.

There is an exception. The charge does not apply to a loan of £15,000 or less to a full-time working participator who holds no more than 5% of the shares. If the loan is above £15,000, or the borrower holds more than 5%, the charge applies to the whole loan.

The charge is repayable. When the loan is repaid, released or written off, the company claims a refund of the tax on that amount. The refund is due nine months and one day after the end of the accounting period in which the repayment or release took place. If the loan is released or written off, the participator is taxed as though they had received a dividend (on the grossed-up amount), and the company gets no deduction for the amount written off. The company can reclaim the loan charge tax on that amount.

Key rules to remember

Interest on underpaid corporation tax: Tax paid late × 8.50% × months (or days ÷ 365) late; Runs from the due date to the date of payment. Use the rate given in the tax tables.
Interest on overpaid corporation tax: Overpayment × 3.50% × time overpaid; HMRC pays this to the company. It is taxable income of the company.
Official rate of interest: Loan × 3.75% × time outstanding; Used to measure the benefit from a cheap or interest-free loan. It is not an HMRC interest charge on tax.
Tax charge on loans to participators: Loan outstanding nine months and one day after the period end × 33.75%; The dividend higher rate. Paid by the close company, not the participator. No charge on loans of £15,000 or less to full-time working participators with no more than 5% of the shares.
Due date for the loan charge: Accounting period end + 9 months + 1 day; Repayment before this date means no charge arises for that amount.
Refund date on repayment: End of the accounting period of repayment + 9 months + 1 day; Relief is repayment × 33.75%.
Normal corporation tax due date: Accounting period end + 9 months + 1 day; Large companies with profits above £1,500,000 pay by quarterly instalments.

How to solve Interest Rates, Late Payment and Related Tax Interest questions

Use this method for any question on interest on corporation tax or on loans to participators.

1Identify what is being asked: interest on late tax, interest on an overpayment, the loan charge, or a benefit from a cheap loan.
2Fix the accounting period and work out the due date: period end plus nine months and one day.
3Find the date the tax or loan was actually paid or repaid, and count the time late in the units the question uses (months or days).
4Pick the right rate from the tax tables: 8.50% underpaid, 3.50% overpaid, 3.75% official rate, 33.75% loan charge.
5Calculate: amount × rate × time. Round to the nearest £ as the supplementary instructions say.
6State who pays or receives it and its tax treatment (taxable, deductible, or neither).
7For loans, check the condition that the company is close and the borrower is a participator, then give the due date for the charge and any refund date.
8Show all workings and state your conclusion clearly in one sentence.

Quickest way: Rate, time, date check

When to use it: Use this in the exam when the question mixes several rates and dates and you need a fast, safe answer.

Write the four rates at the top of your answer: 8.50%, 3.50%, 3.75%, 33.75%.
Match each item in the question to one rate. Late tax is 8.50%. Refund interest is 3.50%. Cheap loan benefit is 3.75%. Participator loan is 33.75%.
Write the due date as period end plus nine months and one day before doing any sums.
Compute amount × rate × months ÷ 12 and round.
Add one sentence on tax treatment or refund timing to pick up the application marks.

Common mistakes in Interest Rates, Late Payment and Related Tax Interest

Using the official rate of 3.75% to calculate interest on late-paid corporation tax.
Both rates sit in the same tables and both are called interest.
Fix: Use 8.50% for underpaid tax and 3.50% for overpaid tax. Use 3.75% only to value a cheap loan benefit.
Charging the loan charge at the corporation tax rate.
Students assume any tax paid by a company is at 19% or 25%.
Fix: The charge on loans to participators is 33.75%, the dividend higher rate. It is a separate charge on the loan, not on profits.
Counting interest from the end of the accounting period instead of from the due date.
Forgetting that tax is due nine months and one day after the period end.
Fix: Always work out the due date first and count from it.
Saying the loan charge is lost once paid.
The refund mechanism is overlooked.
Fix: Say the tax is repayable when the loan is repaid, released or written off. Give the refund date: nine months and one day after the end of the accounting period of repayment.
Treating the participator as the one who pays the loan charge.
The borrower receives the money, so it feels like their tax.
Fix: The close company pays it. The participator is taxed separately only if the loan is written off or released.
Applying the loan charge to every loan, including small loans to working participators.
The exception is easy to forget when the question focuses on the 33.75% rate.
Fix: Check the size of the loan and the borrower. No charge arises on a loan of £15,000 or less to a full-time working participator with no more than 5% of the shares.
Ignoring the tax treatment of the interest itself.
Students stop after the calculation.
Fix: Add that interest received is taxable and interest paid is deductible as a non-trading loan relationship item. Say so briefly.

Worked examples

Example 1

Mallow Ltd has a corporation tax liability of £60,000 for its year to 31 March 2026. It pays the tax three months after the due date. Later it discovers it overpaid a different year's tax by £20,000, and HMRC holds the overpayment for six months before repaying it. Calculate the interest for each. Use the ATX-UK assumed rates.

Show the solution

Due date for the year to 31 March 2026: nine months and one day after the period end, which is 1 January 2027.
Paid three months late, so interest runs for 3 months at the underpaid rate of 8.50%.
Interest payable = £60,000 × 8.50% × 3/12 = £1,275.
Overpayment interest uses the overpaid rate of 3.50%.
Interest receivable = £20,000 × 3.50% × 6/12 = £350.
Treatment: the £1,275 paid is deductible and the £350 received is taxable, as non-trading loan relationship items.

Answer: Interest payable is £1,275. Interest receivable is £350.

Example 2

Brook Ltd, a close company with a 31 March year end, lends £40,000 to Anna, a shareholder, on 1 July 2025. The loan is still outstanding at the due date for the year to 31 March 2026. Brook pays the resulting tax on time. Anna repays £10,000 on 30 June 2027. Calculate the tax charge, the refund and the refund date.

Show the solution

Loan made in the accounting period year to 31 March 2026. Due date for the charge is 1 January 2027.
Tax charge = £40,000 × 33.75% = £13,500, paid by Brook on 1 January 2027.
Anna repays £10,000 on 30 June 2027. This falls in the accounting period year to 31 March 2028.
Relief = £10,000 × 33.75% = £3,375.
The refund is due nine months and one day after 31 March 2028, which is 1 January 2029.
The remaining loan is £30,000. The tax held on it is £30,000 × 33.75% = £10,125, which stays with HMRC until that part is repaid or released.

Answer: The charge is £13,500. Brook can reclaim £3,375, due on 1 January 2029. £10,125 stays outstanding on the £30,000 balance.

Exam tips

Write the due date workings first. Many marks are for the nine months and one day rule.
Take rates from the tax tables, never from memory. The rates are labelled as assumed.
In a close company question, say who the participator is and why the loan charge applies before calculating.
Keep the three rates apart in your answer: interest on tax, official rate for benefits, and the 33.75% loan charge.
Add a short advice line, such as repaying the loan before the due date to avoid the charge, to earn professional skills marks.

Practice questions from Corporation tax: the scope of corporation tax, including close companies and investment companies

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Interest Rates, Late Payment and Related Tax Interest: frequently asked questions

What is the interest rate on late paid corporation tax in ATX-UK?

The tax tables give an assumed rate of 8.50% on underpaid tax. Interest runs from the due date until the date of payment.

What rate does HMRC pay on overpaid corporation tax?

The assumed rate on overpaid tax is 3.50%. Calculate it as the overpayment × 3.50% × the time the money was held, and treat it as taxable income of the company.

Is the official rate of interest the same as interest on underpaid tax?

No. The official rate is 3.75% and is used to measure the benefit from cheap or interest-free loans. The rates on underpaid and overpaid tax are 8.50% and 3.50%.

How is the tax on loans to participators calculated?

Multiply the outstanding loan by 33.75%. The close company pays it nine months and one day after the end of the accounting period in which the loan was made, unless the loan has been repaid by then. It is refunded when the loan is repaid, released or written off.