An interest rate of 7% is applied by HMRC for outstanding balances, whether that’s a late payment or on the Time to Pay arrangement allowing people to pay back any tax owed in instalments.

It is also applied irrespective of whether any late payment penalties have also been charged, such as the automatic £100 fine for not meeting the self-assessment deadline.

The rate is set 2.5% above the Bank of England base rate which currently stands at 5%. Given the 13 base rate hikes since December 2021, taxpayers have been hit with ever higher rates of interest.

In the past year alone, the outstanding balance rate has doubled from 3.5%.

According to the latest HMRC statistics on Time to Pay arrangements, 730,000 individuals and businesses are using the payment plan (Q3 2022/23), paying interest on their outstanding amounts.

Meanwhile, the rate HMRC applies to any amount it owes you stands at just 3.5% – half the amount it charges you if you owe it tax.

According to IWORK which offers information and advice for non-PAYE workers, 600,000 taxpayers were expected to miss the self-assessment deadline on 31 January, “meaning they faced possible late payment fees”.

Further, HMRC has closed its self-assessment taxpayers’ telephone line from 12 June until 4 September, a move which has been “widely criticised”, IWORK said.

And just yesterday, HMRC faced criticism over low-income earners hit with late filing penalties despite owing zero tax.

‘It’s unbelievably unfair’

Julia Kermode, founder of IWORK, said: “Hundreds of thousands of people are being hit with needlessly high interest on late payments. All the while, HMRC gives itself an easy ride, paying half of the amount of interest that it charges. It’s unbelievably unfair.

“Inflicting financial pain on small business owners is reckless, short-sighted and counterproductive.

“Rather than doing everything to help independent workers cope with soaring mortgage payments and the rising cost of living, these underhand tactics do the total opposite.”

One point as to why the interest rate for late payment is higher than the refund rate is to encourage people to pay off any debt sooner rather than later.

An HMRC spokesperson, said: “The interest HMRC charge and pay is fair. It ensures people are not encouraged to overpay their tax to secure a higher interest rate than available commercially, while those paying late don’t get an unfair financial advantage over those paying on time.

“Our seasonal SA helpline trial means that more of our expert advisers are available where they are most needed over the summer. Our improved online services, including the HMRC app and digital assistant, are quick and easy to use and we encourage people to explore these before deciding whether they need to speak to us on the phone.”