To understand what interest rate increases mean for taxpayers we first have to understand how they are set. HM Revenue & Customs set interest rates during legislation and reflect the Bank of England’s base rate which is currently 5.25%.
There are three important interest rates to be aware of:
The difference between rates is influenced by the policy of other tax authorities globally, comparable with interest charged on loans and overdrafts as well as interest paid on deposits.
As Covid restrictions lessened, demand rose. The economy was under pressure from being weakened after the pandemic. Other catalysts such as Russia’s invasion of Ukraine have only added to this pressure and caused energy prices, as well as those of food and other goods, to rise. This contributed to inflation increases and the cost-of-living crisis. The current rate of inflation is nearly 6%, which is more than the Bank of England’s 2% target which may cause interest rates to continue to rise. The rise aims to ease these pressures by limiting economic activity. Staggering demand with higher interest rates deters people from borrowing while businesses will be less inclined to invest, to promote saving instead of spending.
Rising interest rates will affect limited companies and individuals in various ways. For example, slower economic activity will likely cause lower demand for goods or services as consumers are deterred from shopping on credit. Those with savings will see higher returns with the new interest rates but this is yet to match the rising prices of inflation.
Further impacts on businesses’ margins include higher borrowing costs and the knock on effect of increased prices of goods from suppliers which force them to increase their own prices to mitigate or avoid supply disruptions. This could increase inflation even more which will only cause the impacts to be felt that more keenly.
But it could also be a potential opportunity to plan ahead. Those who pay CT early can benefit from 5% interest rate. This may be higher than your current savings or current account rate, in which case earlier is not necessarily better but the most important thing to remember is to pay your tax on time. The new interest rates mean that you will also have higher interest charges for tardy instalments giving even more incentive to be on time.
We can help you identify how rising interest rates will affect your business specifically and what you can do to mitigate these changes. We offer support with compliance deadlines if there are issues with your payment timings and liaising with HM Revenue & Customs if needed. In addition, received bank interests are taxable on individuals meaning that ensuring it is declared correctly is key. We can help you make sure all of your personal tax returns are appropriately declared to avoid any issues, now or in the future.
Get in touch with us to start talking about interest rates with one of our experts and find out what can be done to help your business thrive.