Bank of England cuts interest rates & HMRC cuts late payment interest rate

The Bank of England (BoE) cut the base rate to 5.0% on 1 August, the first reduction in over four years. There was pressure to make this reduction once inflation had hit its 2% target for the past 2 months.

Economists had predicted no cut until the next meeting in September. The bank explained that cutting rates from 5.25%, which had been in place for over a year, was “appropriate to slightly reduce the degree of policy restrictiveness”. It added that “the impact of past external shocks has diminished, and there has been some progress in moderating inflation persistence risks”.

The Bank warned that despite a stronger-than-expected GDP, restrictive monetary policy continues to weigh on real economic activity, leading to a looser labour market and reducing inflationary pressures. While it did not indicate whether further cuts were forthcoming, the cooler inflation figures suggest it is likely.

The Bank expects the fall in headline inflation and normalisation in many inflation expectation indicators to continue to weaken pay and price-setting factors for businesses.

A 0.25% cut will not significantly impact mortgage holders or businesses with large loans but signals the Bank is moving in the right direction.

This led to a 0.25% reduction in HMRC’s late and repayment interests.

HMRC have lowered late payment and repayment interest rates for the first time in a year. The changes took effect from 20 August.

From 20 August, the late payment interest rate decreased to 7.5% from 7.75%, where it has remained for the past 12 months. The repayment interest rate has dropped to 4.0% from 4.25%.

Late payment interest is set at the base rate plus 2.5%, while repayment interest is set at the base rate minus 1%, with a lower limit of 0.5%.

Additionally, on 12 August, the corporation tax self-assessment interest rate for underpaid quarterly instalments decreased to 6.0% from 6.25%.

As a result, HMRC will continue to pay lower interest on overpayments, with the rate decreasing to 4.75% from 5.0%. Similarly, the interest on overpaid quarterly instalments and early payments of corporation tax not due by instalments will also drop to 4.75% from 5.0%.

If you have any questions, please contact 023 8046 1256 or email Michaela Johns.