A larger-than-expected Self Assessment or business tax bill catches many self-employed people and small business owners off guard, especially when payments on account are due. Before turning to a personal loan, it's worth understanding what HMRC itself may be able to offer first.

Check HMRC's own payment plan options first

HMRC offers "Time to Pay" arrangements that let eligible taxpayers spread a tax bill into instalments directly with HMRC, rather than paying it all at once. For many Self Assessment taxpayers below certain thresholds, this can sometimes be arranged online without needing to speak to anyone, while larger or more complex cases may require a direct conversation with HMRC.

Why this matters: A Time to Pay arrangement is often a more straightforward and sometimes cheaper route than commercial borrowing, since it avoids arrangement fees and the need for a separate credit application — though interest does still typically accrue on the outstanding tax, so it's not automatically free.

How HMRC interest compares with a personal loan

HMRC charges interest on late or instalment-paid tax at a rate set by HM Treasury, which changes periodically in line with the Bank of England base rate. Whether this works out cheaper or more expensive than a personal loan depends on the rate at the time and the representative APR you could access elsewhere — it's genuinely worth comparing both rather than assuming one is automatically better.

When a personal loan might make more sense than a Time to Pay arrangement

  • You can access a personal loan rate lower than HMRC's current late payment interest rate
  • You'd prefer the simplicity and certainty of a single fixed monthly payment over the full term, separate from your ongoing tax affairs
  • You want to clear the tax bill in full immediately to avoid any risk of penalties associated with a missed instalment under a Time to Pay plan

Risks of not addressing a tax bill at all

Ignoring a tax bill rather than arranging payment — whether through HMRC directly or other borrowing — can lead to escalating interest, penalties, and ultimately enforcement action from HMRC. If you're struggling to pay, contacting HMRC proactively is almost always better than remaining silent, since Time to Pay arrangements are specifically designed for exactly this situation.

Practical steps if you're facing a tax bill you can't pay in full

  1. Contact HMRC as early as possible — ideally before the payment deadline — to discuss a Time to Pay arrangement
  2. Compare the effective cost of a Time to Pay arrangement against a personal loan, using the current HMRC interest rate and the best personal loan rate you're likely to qualify for
  3. If self-employed, review whether your payments on account for the following year are set appropriately, to avoid a repeat shortfall
  4. Consider setting aside a proportion of income throughout the year specifically for tax, to reduce the risk of a large bill catching you unprepared again

Building in prevention for next year

Many self-employed people find it helpful to transfer a fixed percentage of each payment received into a separate savings account earmarked for tax, rather than treating all income as available to spend. Our Debt-to-Income Calculator can help build this into a wider monthly budget so a tax bill is less likely to be a surprise in future.

For related reading, see our guides on Business Start-Up Loans for Sole Traders: A Guide and The Smart Way to Use a Debt Consolidation Loan.

The bottom line

Before taking out a personal loan to cover a tax bill, check whether an HMRC Time to Pay arrangement might be a simpler and potentially cheaper route. Where a personal loan does make sense — for example, if its rate beats HMRC's current interest — compare it properly, and consider building a dedicated tax savings habit to reduce the risk of facing the same shortfall again.

This article is for general information only and does not constitute financial, legal or tax advice. Rates, thresholds and eligibility criteria change over time — always check current terms with the lender or an FCA-regulated adviser before making a decision. See our full terms and disclaimer.