PAYE is short for Pay As You Earn and is basically where the employer deducts your taxes from your pay and then hands it over to HMRC. The deductions include income tax, National Insurance Contributions and Construction Industry Scheme (CIS) deductions. The money is held in trust for HMRC and it does not belong to the company.
HMRC will collect this money from the company via direct debit on the 22nd of the Month. Using Real Time Information (RTI) software, the company informs HMRC of all payments that are due and what has been deducted etc. This allows for HMRC to spot very quickly if a company has not paid over what is due. In the past, companies could accrue large PAYE debts without HMRC knowing. The RTI system was put in place to stop this abuse.
Check what you owe on the Paye Tax Calculator
If you have your employer tax code, you can click this link to use the PAYE calculator
What happens if you miss payments of PAYE
In theory, it should be difficult as the RTI system and direct debits means that late payments are rare. However, in some circumstances it might happen for instance if there is a sudden cashflow shock. If you do then there may be penalties.
Number of defaults in tax year
Penalty percentage applied to the amount that is late in the relevant month
1 to 3
4 to 6
7 to 9
10 or more
Daily interest will continue to accrue on all unpaid amounts from the due date to the date of payment.
A late payment penalty is charged if you pay under what is due and if this amount is still outstanding after six months then an additional penalty of 5% is charged on the amounts unpaid.
It is unlikely that HMRC will allow large amounts of PAYE to accrue. They will most likely threaten a winding up petition or send round an enforcement officer to take “control of goods”. If this happens you must act. If HMRC have to take this sort of action then it demonstrates that the company is insolvent. The duties of a director change in this situation and they have to act in the best interest of creditors, not the members or directors. Failure to act in this situation could mean that the directors are trading wrongfully, which could have implications for them personally! Don’t bury your head in the sand.
Remember though, that this money is not owed by directors personally but by the company so do not immediately think you will be liable for it. But again failure to act could mean it does become your problem.
What are the options for paying the PAYE Arrears?
Time to pay arrangement
The first thing to do is to contact HMRC and explain the situation. The Business Payments Support Service of HMRC will normally allow 6 months to pay back any arrears as long as they are satisfied that the business is viable and the company has generally been compliant with its taxes in the past. HMRC will want the payments to be made by direct debit and if one payment is missed then the agreement is terminated. This is known as a Time To Pay Arrangement or TTP. We have extensive experience of negotiating these arrangements and can sometimes get more than 1 year to pay back taxes for our clients.
A Company Voluntary Arrangement
If the company is viable if it weren’t for the debt and it could be paid off in full, or substantive part, over 3-5 years then perhaps a company voluntary arrangement (CVA) could be an option. A CVA is an insolvency procedure so should not be undertaken lightly but it is a powerful tool to save an insolvent company. Talk to us if you need advice on this.
Taking out a loan to pay the PAYE
This should only be done in exceptional circumstances. The reason being that any loan to a business that can’t pay its taxes, for whatever reason, will almost certainly need to be personally guaranteed. Is this a risk you want to take? Asking for loans from friends and family or using your own money is a better option but still it should be a last resort and only if you are absolutely certain that you can pay it off later. This may be because the company will receive some sort of windfall.
Liquidation to write off PAYE debts.
Again, this is the last resort and isn’t really a solution to the problem but brings the company to an end. Do remember though that if you start up another company it is likely that HMRC will want some sort of PAYE deposit up front.