Advanced Taxation (UK) · Tax advantages and disadvantages of alternative courses of action

Official Rate of Interest and Interest on Late or Overpaid Tax

Updated 11 October 2026 · Fact-checked

The official rate (3.75% in the ATX-UK tables) values the benefit of a cheap or interest-free employment loan. Interest on underpaid tax (8.50%) values the cost of paying late, and interest on overpaid tax (3.50%) values tax repaid by HMRC. You apply the rate to the amount, for the time period.

Understand Interest Rates: Official Rate and Late or Overpaid Tax

Three rates in the ATX-UK tax tables matter here: the official rate of interest at 3.75%, the rate on underpaid tax at 8.50%, and the rate on overpaid tax at 3.50%. They look alike but do different jobs.

The official rate is used for beneficial loans made by an employer to an employee. The benefit is the interest the employee would have paid at the official rate, less any interest the employee actually pays. It is a taxable benefit in kind, so it is taxed at the employee's income tax rate. The employer's class 1A NIC on benefits is a separate topic.

The underpaid and overpaid rates apply when tax is paid late or when tax has been overpaid and is repaid. HMRC charges 8.50% on tax paid late. It pays 3.50% on tax that was overpaid and is repaid. The gap between the two rates is large, so late payment costs more than an overpayment earns. In the exam, the rates are described as assumed rates and you use them as given.

In planning questions, these rates turn a timing difference into a number. If one option delays a tax payment, you can show the interest cost. You then add it to the tax cost to compare the options on a cash flow basis.

The tax tables are given in the exam, so you do not need to memorise the percentages. You must know which rate to pick and how to apply it for the right number of months.

Key rules to remember

Beneficial loan benefit (average method): Benefit = average loan × official rate × months ÷ 12, less interest paid by employee; Average loan = (opening balance + closing balance) ÷ 2. The official rate in the tables is 3.75%.
Beneficial loan benefit (strict method): Benefit = Σ (balance × 3.75% × months at that balance ÷ 12), less interest paid; Used if HMRC requires it or the question asks for it. Use it when the balance changes during the year.
Interest on underpaid tax: Interest = tax paid late × 8.50% × months late ÷ 12; Runs from the due date to the date of payment. Use the rate given in the tables.
Interest on overpaid tax: Interest = tax overpaid × 3.50% × months ÷ 12; Paid by HMRC on tax that was overpaid and is repaid. The rate is lower than the underpaid rate.
Small loan exemption (the rule): No benefit if total loans to the employee do not exceed £10,000 at any time in the tax year; The £10,000 threshold is not in the rates tables, so it is a rule you must recall. Check that the total of all loans is within the limit.

How to solve Interest Rates: Official Rate and Late or Overpaid Tax questions

Use this method for any question that needs one of these interest rates to compare options or work out a benefit.

1Identify which rate is needed: official rate for an employer loan, 8.50% for late tax, 3.50% for overpaid tax.
2Find the amount and the dates: loan balances, tax due date and payment date.
3Count the months. The exam instructions say to apportion to the nearest month.
4Calculate the interest using amount × rate × months ÷ 12. For loans, use average or strict method as the question requires.
5For loans, deduct any interest the employee actually paid for the same period, then tax the net benefit at the employee's marginal rate.
6Compare the options in a clear table of cash flows, with the interest effect shown separately.
7State your conclusion and a short reason, such as which option has the lower cost or higher net cash.

Quickest way: Rate, months, then compare

When to use it: Use this when time is short and the question gives clear balances or payment dates.

Write the correct rate next to the item at once: 3.75%, 8.50% or 3.50%.
Convert the period to months and write the fraction ÷ 12.
Multiply out. For a loan with a stable balance, the average is simply the balance.
Subtract interest paid. Multiply the net by the tax rate to get the tax cost of the benefit.
Put the answers in the comparison and give a one-line conclusion.

Common mistakes in Interest Rates: Official Rate and Late or Overpaid Tax

Using 8.50% for a beneficial loan instead of the official rate of 3.75%.
All three rates appear in the same table and students pick the biggest one.
Fix: Link the rate to the situation: employer loan means official rate; late tax means 8.50%; repaid tax means 3.50%.
Forgetting to deduct interest the employee paid on the loan.
Students stop after calculating interest at the official rate.
Fix: Always write 'less interest paid' as a line in the working, even if the answer is nil.
Applying the benefit for a full year when the loan existed for only part of it.
Dates are skipped and the year is assumed.
Fix: Count months from the dates in the question and use months ÷ 12.
Treating the loan benefit as the tax payable, rather than as extra taxable income.
Students forget the benefit still has to be taxed at the employee's rate.
Fix: Multiply the benefit by 20%, 40% or 45% (or the correct marginal rate) to show the tax cost.
Using the underpaid rate for a refund, or the overpaid rate for a late payment.
The direction of the cash flow is not checked.
Fix: Ask who pays whom. If you pay HMRC late, use 8.50%. If HMRC pays you, use 3.50%.

Worked examples

Example 1

Priya's employer lends her £60,000 interest-free on 6 April 2025. She repays nothing in the tax year 2025/26. Priya is a higher rate taxpayer. Calculate the income tax cost of the benefit for 2025/26.

Show the solution

The loan is above £10,000, so the small loan exemption does not apply.
Official rate is 3.75%.
Balance is £60,000 for the full 12 months, so the average is £60,000.
Benefit = £60,000 × 3.75% × 12 ÷ 12 = £2,250.
Interest paid by Priya is nil, so the net benefit is £2,250.
Tax at 40% = £2,250 × 40% = £900.

Answer: Taxable benefit £2,250; income tax cost £900.

Example 2

(a) Ravi pays £40,000 of income tax 6 months after the due date. (b) Separately, Meera overpaid £40,000 of income tax, and HMRC repays it with interest for the 6 months it held the overpayment. Calculate the interest in each case.

Show the solution

(a) Late payment uses the underpaid rate of 8.50%.
Interest payable by Ravi = £40,000 × 8.50% × 6 ÷ 12 = £1,700.
(b) A repayment of overpaid tax uses the overpaid rate of 3.50%.
Interest received by Meera = £40,000 × 3.50% × 6 ÷ 12 = £700.
The two cases are separate, so you do not add or net the figures. Note that the rate HMRC charges is higher than the rate it pays.

Answer: (a) Ravi pays interest of £1,700 to HMRC. (b) Meera receives interest of £700 from HMRC.

Exam tips

Copy the three rates from the tax tables into your answer margin at the start, so you do not mix them up.
Show the months and the ÷ 12 on every line. Marks are for method as well as the final figure.
If the loan balance changes, say which method you use and why. Keep to it throughout.
In a comparison question, show the interest effect on its own line and then state which option is better.
Round calculations to the nearest £, as the exam's supplementary instructions allow.

Practice questions from Tax advantages and disadvantages of alternative courses of action

Interest Rates: Official Rate and Late or Overpaid Tax: frequently asked questions

What is the official rate of interest in ATX-UK?

In the tax tables for June 2026 to June 2027 the official rate is 3.75%. You use it to value interest-free or cheap loans from an employer. The benefit is the interest at this rate, less interest the employee actually pays.

What rates apply to underpaid and overpaid tax?

The tables give 8.50% on underpaid tax and 3.50% on overpaid tax. They are treated as assumed rates. Use 8.50% where tax is paid late and 3.50% where tax has been overpaid and is repaid by HMRC.

Do I need to learn the rates for the exam?

No. The tables are reproduced in the exam. You must learn which rate to use and how to apply it for the number of months involved.

Is there a rule that exempts small loans?

Yes. A loan benefit does not arise if the total of the employee's loans does not exceed £10,000 at any time in the tax year. That limit is not in the rates tables, so you need to recall it.