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Advanced Taxation (UK) · Corporation tax: taxable total profits

Interest on Underpaid and Overpaid Corporation Tax in ACCA ATX-UK

Updated 11 October 2026 · Fact-checked

Interest on corporation tax runs when tax is paid late (underpaid) or repaid by HMRC (overpaid). In ATX-UK, the tax tables give assumed rates: 8.50% on underpaid tax and 3.50% on overpaid tax. You find the number of days or months, apply the right rate, and time-apportion the annual rate.

Understand Interest on Underpaid and Overpaid Corporation Tax

Interest compensates for the time value of money. If a company pays tax after the due date, HMRC charges interest on the late tax. If a company pays too early or too much, and HMRC repays it, HMRC pays interest to the company.

The two rates are different. The ATX-UK tax tables give an assumed rate of 8.50% on underpaid tax and 3.50% on overpaid tax. Underpaid interest is higher, so late payment is costly. The rate on overpaid tax is lower.

Interest is an annual rate, so you scale it for the period involved. Interest runs from the date the tax should have been paid to the date it is actually paid (underpaid), or from the date of payment to the date of repayment (overpaid).

The tables also show an official rate of interest of 3.75%. This is a different rate. It is used for beneficial loans to employees (benefits in kind). Do not use it for corporation tax interest.

The tables also give a quarterly instalment profit threshold of £1,500,000. Large companies pay by instalments, so interest on late instalments can arise even before the final due date. Check the question for the dates it gives and for how it wants you to treat the period.

Key rules to remember

Interest on underpaid tax
Tax underpaid × 8.50% × (period late ÷ 12 months)
Use the rate in the ATX-UK tax tables. Use months or days as the question requires, and scale the annual rate.
Interest on overpaid tax
Tax overpaid × 3.50% × (period ÷ 12 months)
Runs from the date the tax was paid to the date of repayment. The rate is lower than the underpaid rate.
Official rate of interest
3.75%
Used for employment-related loans. Not the rate for late or overpaid corporation tax.
Quarterly instalment threshold
Profits above £1,500,000
Given in the tax tables. The threshold decides whether a company is large for instalment purposes.

How to solve Interest on Underpaid and Overpaid Corporation Tax questions

Use this method for any question on interest on corporation tax.

  1. 1Decide whether the tax was paid late (underpaid) or too early or in excess (overpaid).
  2. 2Pick the correct rate from the tax tables: 8.50% for underpaid tax, 3.50% for overpaid tax. Do not use the 3.75% official rate.
  3. 3Identify the amount of tax on which interest runs.
  4. 4Identify the start and end dates. Underpaid: due date to actual payment. Overpaid: payment date to repayment date.
  5. 5Count the period to the nearest month, or in days if the question gives exact dates, as the question requires.
  6. 6Calculate: tax × rate × period ÷ 12 (or ÷ 365 for days). Round to the nearest £.
  7. 7State the result clearly and say whether it is paid by the company or received by it, and comment briefly on the cash flow effect.

Quickest way: Rate, amount, time

When to use it: Use when the question gives a tax figure and two dates and asks for the interest.

  1. Write the rate first: underpaid 8.50% or overpaid 3.50%.
  2. Multiply tax by the rate to get a full year's interest.
  3. Multiply by months ÷ 12.
  4. Label the answer as a cost or a receipt.

Common mistakes in Interest on Underpaid and Overpaid Corporation Tax

  • Using the same rate for underpaid and overpaid tax.

    Students remember one figure and apply it to both situations.

    Fix: Underpaid is 8.50%. Overpaid is 3.50%. Write the rate beside the working before you calculate.

  • Using the 3.75% official rate for corporation tax interest.

    It sits in the same table of rates of interest.

    Fix: The official rate is for beneficial loans. Corporation tax interest uses the underpaid or overpaid rates.

  • Charging a full year of interest for a short period.

    Students forget the rates are annual.

    Fix: Always multiply by months ÷ 12 or days ÷ 365.

  • Counting from the wrong start date.

    Students start from the end of the accounting period instead of the due date.

    Fix: Underpaid interest runs from the due date for payment. Overpaid interest runs from the date the tax was paid.

  • Treating the interest as a gain for the payer.

    Students focus on the rate, not on who pays and who receives.

    Fix: Underpaid interest is a cost to the company. Overpaid interest is received by the company.

Worked examples

Example 1

A company pays corporation tax of £80,000 exactly 6 months after the due date. Calculate the interest charged using the ATX-UK assumed rates.

Show the solution
  1. The tax was paid late, so it is underpaid tax. The rate is 8.50%.
  2. Full year interest: £80,000 × 8.50% = £6,800.
  3. Period: 6 months, so 6 ÷ 12.
  4. Interest: £6,800 × 6 ÷ 12 = £3,400.

Answer: The company pays interest of £3,400.

Example 2

A company overpaid corporation tax by £40,000. HMRC repays it 9 months after the tax was paid. Calculate the interest the company receives using the ATX-UK assumed rates.

Show the solution
  1. The tax was overpaid, so the rate is 3.50%.
  2. Full year interest: £40,000 × 3.50% = £1,400.
  3. Period: 9 months, so 9 ÷ 12.
  4. Interest: £1,400 × 9 ÷ 12 = £1,050.

Answer: The company receives interest of £1,050.

Exam tips

  • Keep the three rates side by side in your workings: 8.50%, 3.50% and 3.75%. Only two apply to corporation tax.
  • Show the rate, the base amount and the time fraction. Marks are given for method.
  • Add one sentence of advice, for example that paying on time avoids the higher 8.50% charge.
  • Round to the nearest £ as the supplementary instructions say and show all workings.

Practice questions from Corporation tax: taxable total profits

Interest on Underpaid and Overpaid Corporation Tax: frequently asked questions

What rate of interest applies to late paid corporation tax in ATX-UK?

The tax tables give an assumed rate of 8.50% on underpaid tax. Apply it to the unpaid amount for the period it is late, scaled by months or days.

What is the difference between the underpaid and overpaid rates?

The underpaid rate is 8.50% and applies when a company pays late. The overpaid rate is 3.50% and applies when HMRC repays tax. The company pays the first and receives the second.

Is the official rate of interest used for corporation tax interest?

No. The 3.75% official rate is used for beneficial loans to employees. Corporation tax interest uses the underpaid and overpaid rates.

Do I need to use days or months?

Follow the question. The supplementary instructions say apportionments are made to the nearest month. If the question gives exact dates and asks for days, scale by days over 365.