HMRC has announced an increase to the interest charged on tax debt after the Bank of England raised the base rate by 0.5 percentage points to 5% in June.

Late payment interest is set at base rate plus 2.5% so customers with outstanding tax debt will see interest on their late payments rise from 7% to 7.5%.

According to the tax authority, this encourages "prompt payment" and "ensures fairness" for those who pay their tax on time.

HMRC will also pay a higher rate to taxpayers who have overpaid their taxes or paid too early, with repayment interest set to increase from 3.5% to 4%, "fairly compensating" taxpayers for loss of use of their money.

The changes for quarterly instalment payments apply from 3 July, while interest on other instalment payments increase on 11 July.

Affected taxes include income tax, National Insurance contributions and capital gains tax.

HMRC said: "The differential between late payment interest and repayment interest is in line with the policy of other tax authorities worldwide and compares favourably with commercial practice for interest charged on loans or overdrafts and interest paid on deposits."

The central bank has gradually increased interest rates since the start of 2022 when the base rate was sitting at 1%. Despite consecutively hiking interest rates after every meeting, it has been unable to bring inflation close to its target of 2%.

Responding to June's rate rise, Chancellor Jeremy Hunt said: "High inflation is a destabilising force eating into pay cheques and slowing growth. Core inflation is higher in 14 EU countries and interest rates are rising around the world, but the lesson from other countries is that if you stick to your guns, you bring inflation down.

"Our resolve to do this is watertight because it is the only long-term way to relieve pressure on families with mortgages. If we don't act now, it will be worse later."

The Bank of England was pushed into a corner as figures from the Office for National Statistics showed that inflation didn't budge from 8.7% in May. While inflation has dipped slightly since a peak of 11.1% in October 2022, it is still stubbornly high.

However, despite the disappointing number, the bank remained firm that inflation will "fall significantly further during the course of the year, in the main reflecting developments in energy prices".

The central bank also said that it is monitoring the impact of the significant increases in bank rate so far. It added that the greater share of fixed-rate mortgages means that "the full impact of the increase in bank rate to date will not be felt for some time".

The next base rate announcement from the Bank of England will be on 3 August 2023.

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