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Watch Those Penalties!

21 June 2011

A new penalty regime for late payment of payroll tax liabilities was introduced in April 2010 but due to the way these are calculated are only now beginning to take effect.

Penalties for the late payment of PAYE are determined by the number of defaults in a tax year.  The first late payment does not attract a penalty but a second (or more) late payment will.  The penalties apply to all employers and contractors regardless of whether they have one or thousands of employees. They apply to monthly, quarterly and annual payment periods of PAYE and to Class 1 national insurance contributions.

 The new penalties are calculated as follows:

Number of defaults


2,3 or 4

1% of the total late paid tax (ignoring the first late payment)

5,6 or 7


8,9 or 10


11 or more


Liability unpaid for more than 6 months

5% surcharge in addition to the penalty above.

Liability unpaid for more than 12 months

Further 5% surcharge in addition to the penalties mentioned above.


As it is not possible to calculate the penalties until the number of defaults are known, the penalties cannot be calculated until after the end of the tax year.  Penalties for the year ended 5 April 2011 are therefore only just being raised now.

There is a concern that these penalties could also come out of the blue years down the line as there is nothing stopping HMRC from, whilst undertaking a compliance review, tracking back through a year to identify amounts on which penalties should have been paid.

Penalties are charged on each PAYE reference.  If you run 2 payroll schemes, you may incur 2 sets of penalties.

Late Payment Interest

In addition to the penalties, late payment interest is also charged on late payments, calculated on a daily basis at the HMRC official rate (currently 3%).  The interest charge is issued at the end of the tax year once HMRC have received all the year end returns.

Payment Dates

In order to ensure your PAYE liability is settled on time you must make sure HMRC have cleared the funds by the due date.  For monthly payments, if you pay electronically, this will mean paying by the end of the last working day before 22nd of each month. (For postal payments, the cheque must reach the HMRC accounts office before 19th of each month and it is advisable to leave at least 3 working days for payment to reach them.)


HMRC may send you a warning letter 2 weeks after the due date if you do not pay on time.  The letter is an advisory notice that HMRC think you may have missed a payment - it is not a penalty demand and cannot be appealed.

If you believe that no PAYE is due for a particular month you must inform HMRC of that fact, otherwise they may log the non payment as a late one!

If a penalty is due, HMRC will issue a late payment penalty letter telling you how much they think you owe. 

If you believe the penalty is incorrect, you have 30 days to lodge an appeal.

Reasonable Excuse

HMRC may not levy a penalty if they agree there is a ‘reasonable excuse’ for the payment being late.  There is no definition of what is ‘reasonable’.  However, it is normally something exceptional that could not have been predicted and was outside your control.  This might include:

  • the death of a close relative at the time the payment was due
  • a fire or flood at the sorting office where the payment was held
  • serious illness of the person responsible for making payment (or a close relative) around the payment date.


The Revenue will not accept pressure of work, lack of information, ignorance of basic law, lack of funds or reliance on someone else as reasonable excuse.

Time To Pay Arrangements

If you believe you may struggle to meet a tax liability it may be possible to enter a time to pay arrangement with HMRC.  The Revenue do however appear to be taking a more hardline approach than they used to in granting these arrangements.

HMRC’s view is that if a business requires a second or third arrangement it is only right that they ensure that the requirement is purely temporary and not the result of a deeper problem.

You should make sure that any time to pay deal is affordable and make all requests in writing.  If you fail to stick to the terms of the payment plan HMRC will rescind the arrangement and ask for immediate full settlement of the liability.

For further information regarding any of the above please contact Pamela Berry,, or your usual Springfords advisor.

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