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Advanced Taxation (UK) · Tax administration and the UK tax system

Interest on Underpaid and Overpaid Tax and the Official Rate

Updated 11 October 2026 · Fact-checked

HMRC charges interest on tax paid late and pays interest on tax overpaid. In ATX-UK the tax tables give assumed rates: 8.50% on underpaid tax, 3.50% on overpaid tax and 3.75% official rate for beneficial loans. Interest runs for the days or months involved, so you apply the rate to the tax for the period.

Understand Interest on Underpaid and Overpaid Tax and the Official Rate

Tax has due dates. If you pay after the due date, HMRC charges interest on underpaid tax. This is compensation for the late payment. It is not a punishment. If you pay too much and HMRC holds the money, it pays you interest on overpaid tax. The rate paid to you is lower than the rate charged to you.

The ATX-UK tax tables give assumed rates: 8.50% on underpaid tax and 3.50% on overpaid tax. The exam gives you these rates. You do not need to remember them, but you must know which one applies to which situation.

The official rate of interest is a different thing. It is 3.75% in the tables. It is used for employment-related loans. If an employer lends money to an employee at no interest, or at less than the official rate, the employee has a taxable benefit. The benefit is the interest at the official rate less any interest the employee actually pays. It is not interest owed to or by HMRC.

Interest is also different from penalties. Interest compensates for time. Penalties punish behaviour, such as late filing, late payment or careless errors. In a written answer, keep them apart. A late VAT payment, for example, can bring a percentage penalty from the VAT table as well as interest.

The exam is written and scenario-based. You may be asked to calculate the interest, explain why it arises, or advise a client on the cash-flow cost of delay. Show your working and state the rate you use.

Key rules to remember

Interest on underpaid tax
Tax paid late × 8.50% × (time late ÷ 12 months, or days ÷ 365)
Rate is the assumed rate in the ATX-UK tax tables. Runs from the due date to the date of payment.
Interest on overpaid tax
Tax overpaid × 3.50% × (time held ÷ 12 months, or days ÷ 365)
Rate is the assumed rate in the tables. This is paid by HMRC to the taxpayer.
Beneficial loan benefit (average method)
((Opening balance + Closing balance) ÷ 2) × 3.75% × (months ÷ 12) − interest paid by employee
The official rate is 3.75% in the tables. Check whether the question asks for the average or the strict method.
Interest versus penalty
Interest = compensation for time. Penalty = charge for behaviour or lateness
The two can arise together on the same late payment.

How to solve Interest on Underpaid and Overpaid Tax and the Official Rate questions

Use this method for any question on interest, whether it is on tax or on a loan.

  1. 1Identify the type: late-paid tax, overpaid tax, or a beneficial loan. This decides the rate.
  2. 2Pick the rate from the tax tables: 8.50% underpaid, 3.50% overpaid, 3.75% official rate.
  3. 3Find the start date: the due date for underpaid tax, the date of payment for overpaid tax, or the start of the loan period.
  4. 4Find the end date: the date of actual payment or repayment, or the end of the tax year or loan.
  5. 5Work out the time in months (or days) and convert to a fraction of a year. Apportion to the nearest month, as the supplementary instructions require.
  6. 6Multiply the amount by the rate and the time fraction. For a loan, deduct any interest the employee paid.
  7. 7Round to the nearest £ and state the answer with a short comment on whether a penalty could also apply.

Quickest way: Rate, amount, months

When to use it: Use this when the question gives a clear amount and a clear period, and you have little time.

  1. Write the rate next to the amount at once.
  2. Count the whole months.
  3. Compute amount × rate × months ÷ 12.
  4. Add one line saying interest is not a penalty, if the question mentions penalties.
  5. Round to the nearest £.

Common mistakes in Interest on Underpaid and Overpaid Tax and the Official Rate

  • Using the official rate (3.75%) for late-paid tax.

    The tables list several rates close together and they look alike.

    Fix: Official rate is for beneficial loans only. Late tax uses 8.50%.

  • Using 8.50% for tax HMRC owes back to the taxpayer.

    Students assume one rate covers both directions.

    Fix: Overpaid tax earns 3.50%. Underpaid tax costs 8.50%.

  • Treating interest as a penalty or the other way round.

    Both arise on late payment.

    Fix: Say interest compensates for time. Penalties are separate and come from the penalty tables.

  • Forgetting to deduct interest paid by the employee in a beneficial loan.

    Students stop after applying the official rate.

    Fix: Benefit = interest at the official rate less interest actually paid. If the result is nil or negative, there is no benefit.

  • Counting the wrong period, for example from the end of the tax year rather than the due date.

    Students do not check the due date.

    Fix: Write the due date and the payment date, then count months between them.

Worked examples

Example 1

Aisha paid ₹ is not used here. A UK client, Aisha, owed income tax of £6,000, due on 31 January. She paid on 31 July, six months late. Calculate the interest on the underpaid tax using the rates in the ATX-UK tax tables.

Show the solution
  1. Type: underpaid tax, so the rate is 8.50%.
  2. Time late: 31 January to 31 July is 6 months, so 6 ÷ 12.
  3. Interest = £6,000 × 8.50% × 6 ÷ 12.
  4. £6,000 × 8.50% = £510 for a full year.
  5. £510 × 6 ÷ 12 = £255.

Answer: Interest on the underpaid tax is £255. Penalties for late payment are separate and would be charged in addition if they apply.

Example 2

An employer lends an employee £24,000 on 6 April 2025 and the balance stays the same for the whole 2025/26 tax year. The employee pays interest of £400 during the year. Calculate the taxable benefit using the official rate in the tax tables.

Show the solution
  1. Type: beneficial loan, so use the official rate of 3.75%.
  2. Balance is constant, so the average is £24,000.
  3. Interest at the official rate = £24,000 × 3.75% = £900.
  4. Deduct interest paid by the employee: £900 − £400 = £500.

Answer: The taxable benefit is £500 for 2025/26.

Exam tips

  • Highlight the rates you need in the tax tables before you start. Do not rely on memory.
  • Always state the rate and the period in your answer, so you pick up method marks even if the numbers slip.
  • Where a question mentions both interest and penalties, show them as two separate lines.
  • Work to the nearest month and the nearest £, as the supplementary instructions say.
  • For professional skills marks, add one sentence on the cash-flow cost of paying late versus paying on time.

Practice questions from Tax administration and the UK tax system

Interest on Underpaid and Overpaid Tax and the Official Rate: frequently asked questions

What are the interest rates in the ATX-UK tax tables?

The tables give assumed rates of 3.75% for the official rate, 8.50% on underpaid tax and 3.50% on overpaid tax. You use the rate that matches the situation in the question.

What is the difference between late payment interest and penalties?

Interest compensates HMRC for the time it did not have the money. Penalties are charges for behaviour, such as paying late or making errors. Both can apply to the same late payment.

What is the official rate of interest used for?

It is used to value the benefit from cheap or interest-free employment-related loans. The benefit is interest at the official rate less any interest the employee pays.

Does HMRC pay the same rate on overpaid tax as it charges on underpaid tax?

No. In the tables the rate on overpaid tax is 3.50%, which is lower than the 8.50% charged on underpaid tax.