On 18 December 2025, the Bank of England reduced its main interest rate from 4% to 3.75%. This is the lowest level in nearly three years. The Monetary Policy Committee approved the decision in a close 5–4 vote. The rate cut helps the households and businesses by making borrowing cheaper and supporting the UK economy (source: Bank of England).
Lower interest rates should reduce monthly loan and mortgage payments. This also helps businesses and households plan their finances more effectively. Businesses may find it easier to access funding, which can support investment, expansion, and day-to-day cash flow. Overall, the goal is to ease financial pressures for households and businesses.
Why the Bank Made This Move
The UK economy has slowed in recent months. Many people are spending less on non-essential items because living costs are high. Some sectors are also seeing rising unemployment. Businesses are feeling the strain too. Higher costs and ongoing uncertainty affect daily operations and long-term planning (source: Reuters).
By lowering the base rate, the Bank aims to:
- Reduce borrowing costs
- Improve household and business cash flow
- Support financial stability without reigniting inflation
While the cut provides some breathing room, it reflects caution rather than confidence. Economic conditions remain uncertain.
Rate Cut Update: Impact on HMRC Interest Rates
The Bank of England’s decision to cut the base rate also affects HMRC interest charges on late tax payments.
When the base rate falls from 4% to 3.75%, HMRC interest rates drop as well. For most taxes, the late-payment interest rate will decrease from 8% to 7.75%.
These changes do not apply immediately. HMRC usually updates its rates a few weeks after a Bank of England decision.
Following the rate cut on 18 December 2025:
- The new HMRC rate will apply from 29 December 2025 for quarterly instalment payments.
- The new rate will apply from 9 January 2026 for non-quarterly payments.
The lower rate offers relief for households and businesses with tax debt. However, 7.75% interest remains high by historical standards. Late tax payments will still increase costs over time. Avoiding delays is important.
Implications for Households and Businesses
Cheaper borrowing helps households and businesses, but savers may earn less money. Reviewing your finances can help you make the most of these changes. Here’s what it could mean for you:
For Households
- Mortgages and loans: Monthly repayments may become more manageable, easing pressure on household budgets.
- Credit cards and overdrafts: Interest charges may fall, reducing the cost of carrying short-term debt.
- Savings accounts: Returns may be smaller, which could slow down the growth of savings over time.
- Tax payments: Interest charged by HMRC on late payments may be reduced, lowering the cost of delays.
For Businesses
- Loans and financing: Borrowing may cost less, leaving more cash available for daily operations.
- Investment and growth: Access to cheaper finance may support expansion, hiring, and investment plans.
- Operating costs: Debt repayments may take up a smaller share of income, helping with ongoing expenses.
- Tax compliance: Interest on late tax payments may be lower, easing pressure on cash flow.
Economic Outlook and Key Considerations
Lower interest rates provide some relief, but it is still important to watch the bigger picture. Living costs remain high, and job security varies by industry. These factors can affect income stability and confidence. At the same time, lower rates may reduce returns on savings, so it is worth reviewing long-term financial plans.
Inflation trends, government policies, and global economic developments will continue to influence future interest rate decisions. Staying informed and regularly reviewing your budget, loans, and savings can help you respond effectively to changing conditions.
Expert Guidance in Uncertain Times
The Bank of England’s rate cut gives temporary relief, but households and businesses continue to face rising costs. Legend Financial offers expert guidance to help individuals and businesses understand how changing interest rates affect their borrowing, enabling informed and confident funding decisions.
Need help with your business funding? In partnership with Portman Finance Group, we provide tailored loan support to ensure you access the finance you need, exactly when you need it.
