Paying VAT late: how late payment interest works beside the penalties

acrenvo.com/guides/vat-late-payment-interest, last reviewed 31 October 2026

Amira is fictional, but her week will be familiar to plenty of sole traders. She runs a small catering business, is registered for VAT and sends her VAT Return every quarter through software, as Making Tax Digital (MTD) for VAT asks. This time the return went in on the deadline, but a large customer paid her late and she could not pay the VAT until the following week. She wants to know what that week will cost, and whether it counts against her the way a late return would. This guide sets out what GOV.UK says about late payment interest on VAT, and how it sits beside the late payment penalties.

Interest and penalties are separate charges

The first thing to know is that paying late can lead to two different charges, and they work on different clocks. For VAT accounting periods starting on or after 1 January 2023, you’ll be charged late payment interest on overdue payments. This is one of several penalty and interest changes that replaced the existing VAT default surcharge.

Interest is the one that starts straight away, while a penalty only comes later. GOV.UK puts the two together like this: “If the payment is more than 15 days late, you will also be asked to pay a late payment penalty — the sooner you pay, the smaller the penalty will be.” For that reason a payment that is a few days late usually costs interest alone, while a payment that is weeks late costs both.

Your deadline for paying is the same as your deadline for the return. In GOV.UK’s words, the deadline for submitting your return online is usually one calendar month and 7 days after the end of an accounting period. This is also the deadline for paying HMRC. You need to allow time for the payment to reach HMRC’s account.

How the interest rate is set

The rate is not fixed, because it follows the Bank of England. GOV.UK says that late payment interest is charged from the first day that the payment is overdue until the day it’s paid in full. It’s calculated at the Bank of England base rate plus 4%. When the base rate moves, the interest rate on late VAT moves with it.

HMRC’s table of interest rates gives the figure in force. When we read it on 12 October 2026, it said: “late payment interest rate — 7.75% from 9 January 2026”, and it gave the margin over base rate as “late payment interest set at base rate plus 4% from 6 April 2025 (was plus 2.5% on or before 5 April 2025)”. GOV.UK last updated that table on 23 December 2025, so check HMRC’s interest rates table for the rate on the days your payment was late. Your VAT online account will tell you when you are being charged late payment interest.

A worked example from GOV.UK

GOV.UK shows how the sum works with a business it calls D. Amira can follow the same steps with her own figures and the rate on the days she was late.

Put simply, the interest is the amount owed, times the yearly rate, times the number of days late, divided by the days in the year. In GOV.UK’s example the payment was a week late, which is before any late payment penalty starts, so interest was the only charge.

What the interest is charged on

Interest is not limited to the VAT shown on a return. Interest will be charged on all late payments where VAT is due. This includes amounts overdue following:

• a VAT Return
• an amendment or correction of a return
• a VAT assessment made by HMRC
• a missed VAT payment on account

A penalty that goes unpaid also picks up interest of its own. Interest will also be charged on all penalties if they are overdue including:

• late payment penalties for late payment of VAT
• late submission penalties for not submitting a return on time

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How the late payment penalties add to it

If Amira’s payment had run on for longer, a penalty would have been added to the interest. You’ll get a first late payment penalty if your payment is 16 or more days overdue. When your payment is 31 or more days overdue, your first late payment penalty increases, and you get a second late payment penalty. For late payment penalties, the sooner you pay the lower the penalty amount will be.

The penalties are covered in more detail, with GOV.UK’s rates and the points for late returns, in the guide to VAT penalty points beside MTD for Income Tax penalty points.

If you cannot pay on time

GOV.UK’s advice is to speak to HMRC early rather than wait. Contact HMRC as soon as possible if you:

• have missed a tax deadline
• know you will not be able to pay a tax bill on time

An arrangement to pay over time can reduce the penalties, but interest still runs on what is left. If HMRC agree a Time to Pay arrangement with you, it can mean lower, or no, late payment penalties. It can cover all outstanding amounts due, including penalties and interest. Where an amount due is paid in instalments, such as a Time to Pay arrangement, HMRC charges interest on the outstanding balance until you pay the tax in full.

Objecting to an interest charge

Interest is treated differently from a penalty when you disagree with it. You cannot appeal against your late payment interest charge. However, you can object if:

• HMRC has made a mistake or caused an unreasonable delay, which has contributed to the build-up of interest
• you dispute the relevant date or effective date of payment
• you are questioning the legislation

For how VAT and Income Tax fit together more generally, the guide to MTD for VAT and MTD for Income Tax is the place to start.

Questions about late payment interest on VAT