Advanced Taxation (UK) · Legitimate tax planning measures

Interest on Tax and Cash Flow Planning for ACCA ATX-UK

Updated 11 October 2026 · Fact-checked

HMRC charges interest on tax paid late and pays interest on tax overpaid. The tax tables give assumed rates: 8.50% underpaid, 3.50% overpaid, and a 3.75% official rate for beneficial loans. To plan cash flow, you compare tax saved or deferred against interest, penalties and the date cash actually leaves the business.

Understand Interest on Tax and Cash Flow Planning

Tax is paid on set dates. If you pay after the due date, HMRC charges interest from the due date until the day you pay. If you pay too much, HMRC pays you interest from the date of payment until the date of repayment. The rates are not the same. Underpaid interest is higher than overpaid interest, so being late costs more than being early earns.

The ATX-UK tax tables give assumed rates: official rate of interest 3.75%, interest on underpaid tax 8.50% and interest on overpaid tax 3.50%. You use these figures as given. Do not use real-world rates from memory.

The official rate is a different thing. It is used to measure the taxable benefit when an employer gives a cheap or interest-free loan to an employee. It is not charged by HMRC on late tax. Keep the two ideas apart: the 3.75% is for the benefit calculation, and 8.50% and 3.50% are for tax paid late or early.

Cash flow planning means choosing the timing of transactions so that tax falls due later, or is lower. Examples are making a disposal just after a tax year end, so the gain falls into the next year and the tax is due about a year later, or deferring a purchase or sale around a payment date. The saving from deferral is roughly the tax multiplied by the interest rate you avoid, for the months of delay.

Good advice also looks at the other side. A later payment date may mean a higher rate of tax, a lost annual exempt amount or a penalty. In the exam you quantify the benefit, name the risk, and give a clear recommendation.

Key rules to remember

Interest on underpaid tax: Tax paid late × 8.50% × (months or days late ÷ 12 or 365); Runs from the due date to the date of payment. Use the rate in the tax tables. Follow the question on whether to count in months or days.
Interest on overpaid tax: Tax overpaid × 3.50% × (time ÷ 1 year); Runs from the date of payment (or due date, if later) to the date of repayment. Only use the dates the question gives you.
Official rate of interest: 3.75%; Used to value a beneficial loan benefit. It is not the rate HMRC charges on late tax.
Benefit of cheap or interest-free loan: Average (or strict) loan balance × (3.75% − interest paid by employee rate) × (months ÷ 12); Cross-reference with the benefits in kind topic. It is shown here to separate it from late payment interest.
Saving from deferral: Tax deferred × 8.50% × (months deferred ÷ 12); A rough measure of the interest saved. Use a different rate only if the question tells you the business borrows or earns at another rate.

How to solve Interest on Tax and Cash Flow Planning questions

Use this method for any question on interest, late payment or timing of tax to manage cash flow.

1Identify what the question asks: interest on late tax, interest on overpaid tax, a beneficial loan benefit, or advice on timing.
2Find the tax in question, the due date and the actual or proposed payment date.
3Work out the period in months or days. Count from the due date to the payment date for underpaid tax.
4Choose the correct rate from the tax tables: 8.50% underpaid, 3.50% overpaid, 3.75% official rate for loans.
5Calculate interest as tax × rate × period. Show the working, rounded to the nearest £.
6For planning questions, compare the two timings: tax due dates, tax rates, reliefs and interest saved.
7Note any risks such as penalties, a higher rate of tax or lost allowances, and give a clear recommendation.
8State assumptions, for example that the rates in the tax tables continue to apply.

Quickest way: Rate, amount, period

When to use it: Use when the question gives you the tax, the dates and asks for a quick interest figure or a deferral saving.

Write the rate from the tax table next to the question: 8.50%, 3.50% or 3.75%.
Write the tax amount and the number of months or days.
Multiply: amount × rate × months ÷ 12.
Write one line on why the timing matters, then one line on a risk or condition.

Common mistakes in Interest on Tax and Cash Flow Planning

Using the official rate of 3.75% to charge interest on late tax.
Both rates appear in the same table and students mix up their purpose.
Fix: Official rate is for beneficial loans only. Late tax uses 8.50% and overpaid tax uses 3.50%.
Using the underpaid rate for overpaid tax, or the other way round.
Students rush and take the first rate they see.
Fix: Ask whether HMRC is owed money or owes money. HMRC is owed: 8.50%. HMRC owes: 3.50%.
Counting interest from the wrong date.
The start date is confused with the date the liability was discovered or the return was filed.
Fix: Underpaid interest runs from the due date, not from when the error was found.
Ignoring the time period and quoting a full year of interest.
The rate is annual and students forget to scale it.
Fix: Always multiply by months ÷ 12 or days ÷ 365.
Recommending deferral without mentioning risk.
Students focus on the interest saved and forget the wider picture.
Fix: Add a sentence on rate changes, lost annual exempt amount, penalties or commercial risk, as the scenario allows.

Worked examples

Example 1

A client should have paid ₹ tax... Replace currency: A UK client should have paid £40,000 of tax on 31 January 2026 but pays on 30 June 2026. Calculate the interest on the underpaid tax, using the rate in the ATX-UK tax tables and counting whole months.

Show the solution

The rate for underpaid tax is 8.50%.
Period from 31 January 2026 to 30 June 2026 is 5 months.
Interest = £40,000 × 8.50% × 5 ÷ 12.
£40,000 × 8.50% = £3,400 for a year.
£3,400 × 5 ÷ 12 = £1,416.67, which is £1,417 to the nearest £.

Answer: Interest on the underpaid tax is £1,417.

Example 2

A company can defer a £120,000 tax payment by 9 months by timing a transaction after its year end. Estimate the interest saved using the underpaid rate, and give one point to consider before recommending it.

Show the solution

Use 8.50% as the rate that would apply if the tax were paid late.
Interest saved = £120,000 × 8.50% × 9 ÷ 12.
£120,000 × 8.50% = £10,200 for a year.
£10,200 × 9 ÷ 12 = £7,650.
Point to consider: the later timing must not cause a higher rate of tax, a lost relief or a penalty, and it must make commercial sense.

Answer: The estimated cash flow benefit is £7,650. Recommend deferral only if the tax rate and reliefs stay the same and the timing is commercially sound.

Exam tips

Copy the three rates from the tax tables onto your answer plan before you start, and label each one.
Show the period in months and the formula, so you earn method marks even if the arithmetic slips.
In planning questions, give the interest or cash saving and then a risk. Both earn marks.
Do not use real-world rates. The exam rates are assumed and given in the tables.
Link timing advice to the client's objectives, such as cash shortage or a planned purchase.

Practice questions from Legitimate tax planning measures

Interest on Tax and Cash Flow Planning: frequently asked questions

What interest rates does ATX-UK give for tax?

The tax tables give an official rate of 3.75%, interest on underpaid tax of 8.50% and interest on overpaid tax of 3.50%. These are assumed rates for the exam. You use them as given.

Is the official rate the same as the interest HMRC charges on late tax?

No. The official rate of 3.75% is used to value a benefit from a cheap or interest-free employee loan. Late tax is charged at the underpaid rate of 8.50%.

How is interest on late paid tax calculated?

Multiply the unpaid tax by the underpaid rate and by the fraction of a year it was late. The period runs from the due date to the date of payment.

How does deferring tax help cash flow?

Paying later keeps cash in the business for longer. You estimate the value as the tax deferred multiplied by a suitable interest rate for the time delayed, then check for risks.