At a glance
From 6 April 2010 HMRC will charge penalties on PAYE and NICs that is paid late.
Penalties will apply to late payments for:
- PAYE (including PAYE Settlement Agreements and determinations).
- National Insurance contributions (NICs) (including annual payments of Class 1A)
- Construction Industry Scheme (CIS) deductions
- Student Loan deductions
Penalties will be charged according to whether the payment is due monthly, quarterly or annually.
- Larger employers: should receive an automated warning letter when a payment is late. This requires no action (although the employer will need to confirm to itself that a payment was infact late: it may need to appeal this point later). A manually generated penalty notice will be issued by HMRC for second and subsequent defaults.
- Smaller employers: it will not be possible for HMRC to generate automated warnings. HMRC will send notifications of late payment penalty charges after the end of the year.
- HMRC has up to two years after the late payment occurred to issue a penalty letter.
- Smaller (and presumably "medium sized") employers may have find that a whole year or longer has elapsed before they are aware that a penalty has been charged.
- The onus is on the employer to contact HMRC if it considers that it has cashflow problems and needs time to pay. It should do this before it defaults.
- The employer should create adequate systems so that it can confirm when a payment is made, should it be necessary to appeal penalties at a later stage.
- Increasing penalties have the potential to make a company insolvent (when eventually levied).
- Directors will need to review late payments and keep abreast of the position, if there is a danger that it is close to trading insolvently, particularly if the business is experiencing cashflow problems.
- The effect of uncharged penalties or appeals lodged at the balance sheet date will need to be appraised when the accounts are signed off.
- Care is needed to work out if any penalties are due when a business ceases trading and these will need to be fractored into tax covenants and warranties when a business is bought or sold.
- There may be a substantial delay between a company ceasing in business and the time that it can be struck off the Companies Register. If HMRC delays raising a penalty notice it will presumably be unable to give clearance to Companies House to proceed.
- Advisers should discuss the new regime with clients and update engagement letters accordingly.
Practical considerations:
Penalties may apply if you are only a day late. As with the VAT penalty regime, penalties increase over time.
Overview and FAQs
New PAYE and NICs penalties
How they are calculated:
The amount of penalty depends on whether payment is due on a monthly or quarterly basis, or annually.
1% to 4% monthly and quarterly payments
For late monthly and quarterly payments the penalty will start at 1% of the late amount and will increase to 4% depending on how many more times a payment for a period is made late. There will be no penalty if only one payment is late in any tax year, unless the payment is more than six months late.
Unless a payment is more than 6 months late, the amount of the penalty will depend on two things: how much is late and how many times payments are late in a tax year.
The table below shows how the monthly and quarterly penalties will be calculated:
|
No of times payments are late in a tax year |
Penalty percentage |
Amount to which penalty percentages apply |
|
1 |
No penalty |
Total amount that is late in the tax year (ignoring the first late payment in that tax year). |
|
2-4 |
1% |
|
|
5-7 |
2% |
|
|
8-10 |
3% |
|
|
11 or more |
4% |
5% monthly and quarterly amounts more than six months late
HMRC may charge penalties of 5% of the amount that is late on any monthly or quarterly payments:
- 5% if more than six months late.
- A further 5% if still not paid after 12 months.
5% Annual payments (for example Class 1A NICs and PAYE Settlement Agreements)
- HMRC may charge up to three penalties of 5% of the amount that is late, depending on the length of time that the amount is not paid in full.
|
% total penalty by time of payment |
When paid |
| 0% | 1 - 29 days of due date |
|
5%
|
30 days of due date |
|
10%
|
6 months of due date |
|
15%
|
12 months of due date |
Interest on late payment
- HMRC confirm that no interest will be charged on late payments until 5 April 2012.
Can I appeal against a penalty?
Mitigation: reasonable excuse
- A tax penalty will not be charged if, on appeal, there is a reasonable excuse for not making a tax payment on time.
- See Tax penalties: grounds for appeal for a review of what the courts consider to be reasonable as an excuse.
What if I cannot pay?
Contact HMRC's business support service and negotiate to pay by instalments.
