PENALTIES FOR LATE PAYMENT OF PAYE

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1 PENALTIES FOR LATE PAYMENT OF PAYE OVERVIEW For return periods starting on or after 6 April 2010, HMRC may charge penalties where PAYE is not paid in full and in time. Under the new penalty regime, the penalty charged depends on the number of times PAYE was paid late during the tax year. However, a penalty is not charged if only one PAYE payment is made later during the tax year (provided that payment was not made more than six months late). The penalty rates range from 1% to 4% of the tax paid late, depending on the number of late payments made during the year. Additional penalties are charged for amounts that remain unpaid six months and 12 months after the due date. A PAYE month end runs to the fifth of the month. Where payment is made other than electronically (e.g. by cheque) payment must reach the Accounts Office by the 19 th of the month. Where payment is made electronically, cleared funds must reach HMRC s bank account by 22 nd of the month. Payment must be made in full and on time each month if late payment penalties are to be avoided. Penalties are levied after the end of the tax year to which they relate. A right of appeal exists against a penalty notice. KEY FACTS A PAYE month runs to the fifth of the month. PAYE, Class 1 National Insurance contributions, student loan deduction and deductions under the Construction Industry Scheme for each PAYE month (or quarter) must be paid over to HMRC. Payment deadlines depend on whether payment is made electronically or not. If payment is not made electronically (e.g. by cheque), payment for the month must reach the Accounts Office by 19 th of the month in which the PAYE month ends. If payment is made electronically, payment must clear HMRC s bank account by 22 nd of the month in which the PAYE month ends. Small employers whose monthly PAYE bill averages 1,500 or less can pay PAYE over to HMRC quarterly instead of monthly. Under quarterly payment, PAYE quarters end on 5 July, 5 October, 5 January and 5 April. Under quarterly payment, payment must reach the Accounts Office by 19 th of the month in which the quarter ends unless made electronically. Under quarterly payment, where payment is made electronically, payment must clear HMRC s bank account by the 22 nd of month in which quarter ends. Page1

2 If the payment deadline falls on a weekend or Bank Holiday, payment must reach the Accounts Office (cheque payments) or clear HMRC s bank account (electronic payments) by last bank working day before deadline. For periods starting on or after 6 April 2010 penalties may be charged where PAYE is not paid on time and in full. The penalty that may be charged depends on the number of times payment is made late during the tax year. No penalty is charged if only one payment is made late in any one tax year (unless that payment is at least six months late). The penalty is a percentage of the tax paid late. The percentage ranges from 1% to 4% depending on the number of late payments in the tax year. The penalty is levied after the end of the tax year. An additional penalty of 5% is charged for amounts unpaid after six months. A further 5% penalty is charged for amounts unpaid after 12 months Where a penalty is due, HMRC send a late payment penalty notice, setting out the amount of the penalty and the date by which it should be paid. HMRC have a window of two years in which to send out a penalty notice. No penalty is due if HMRC accept that there is a reasonable excuse for not paying in full and on time. A right of appeal exists against a penalty notice. In the case of payment difficulties resulting in problems paying PAYE in full and on time, contact HMRC s Business Support Service on Penalties may also be charged for Class 1A National Insurance contributions paid late and also amounts due under a PAYE Settlement Agreement paid late. REQUIREMENT TO PAY PAYE AND NATIONAL INSURANCE CONTRIBUTIONS TO HMRC Employers are responsible for paying over PAYE, Class 1 National Insurance contributions, student loan deductions and payments deducted under the Construction Industry Scheme over to HMRC. In most cases, amounts must be paid over to HMRC monthly. However, small employers whose average monthly PAYE/National Insurance bill is less than 1,500 can pay quarterly instead. PAYE MONTH A PAYE month runs to the fifth of each month. A tax year is divided up into 12 months for PAYE purposes as follows. Month 1 Month 2 6 April to 5 May 6 May to 5 June Month 3 Month 4 6 June to 5 July 6 July to 5 August Page2

3 Month 5 Month 6 Month 7 Month 8 Month 9 Month 10 Month 11 Month 12 6 August to 5 September 6 September to 5 October 6 October to 5 November 6 November to 5 December 6 December to 5 January 6 January to 5 February 6 February to 5 March 6 March to 5 April PAYE QUARTERS Where PAYE is paid quarterly, the tax year is divided into quarters as follows: Quarter 1 Quarter 2 Quarter 3 Quarter 4 6 April to 5 July 6 July to 5 October 6 October to 5 January 6 January to 5 April PAYMENT DEADLINE PAYING BY CHEQUE If payment is made other than electronically, such as by cheque, the payment must reach the Accounts Office by the 19 th of the month in which the tax month or quarter end at the latest. Example PAYE and NIC paid by cheque for month 1 (ending on 5 May) must reach the relevant Accounts Office on or before 19 May. It is important that the payment is posted in sufficient time to arrive at the Accounts Office by the 19 th of the month. If it arrives after this date, the payment will be treated as late and may trigger a penalty. This is the case even if it was posted several days earlier. To avoid the potential for a payment being late as a result of a postal delay, it is recommended that payments are made electronically. Page3

4 PAYMENT DEADLINE PAYING ELECTRONICALLY Where payment is made electronically, cleared funds must reach HMRC s bank account by the 22 nd of the month. Consequently, the payment must be sent in sufficient time to allow it to clear by that date. Electronic payment methods include BACS, CHAPS, direct debit, internet banking, telephone banking and Bank Giro. Example PAYE and NIC is paid electronically for month 1 (ending 5 May). Cleared funds must reach HMRC s account by 22 May. HMRC recommend that payments of PAYE are made electronically rather than by cheque. DEADLINE FALLS ON A BANK HOLIDAY OR WEEKEND If the payment deadline falls on a bank holiday or weekend, the effective deadline is the last bank working day before the deadline. Where the payment is made other than electronically and the 19 th falls on either a bank holiday or a Saturday or Sunday, the payment must reach the Accounts Office by the last bank working day before the 19 th at the latest. Bank working days are Monday to Friday excluding bank holidays. Where the payment is made electronically, the cleared funds must reach HMRC s bank account by the last bank working day before 22 nd at the latest. ACTIVATING PAYMENTS The following table shows the date on which payment must be activated to ensure payment clears HMRC s bank account in time, depending on which day of the week the 22 nd of the month falls. Day on which 22 nd falls Date funds must clear by Last day for setting up a direct debit payment New DD Existing DD Last day for initiating payment by CHAPS BACS, internet or telephone banking. Page4

5 Bill Pay, Bank Giro, Post Office Monday Monday 22nd Monday 15 th Monday Thursday 17 th 22 nd 18 th Tuesday Tuesday 22nd Tuesday 15th Thursday 17 th Tuesday 22nd Friday 18th 22nd 15th Friday 17th 22nd Monday 20 th Thursday Thursday Thursday 15th Monday Thursday Tuesday 22 nd 19 th 22 nd 20 th Friday Friday 22 nd Sunday 17 th Tuesday 19 th Friday 22 nd 20th Saturday Friday 21 st Sunday 16 th Tuesday 18th Sunday Friday 20th Sunday 15th Tuesday 17th Source: HMRC s Employer Bulletin (April 2010, Issue 35) Friday 21 st Friday 20th 19th 18th HMRC S BANK ACCOUNT To ensure that the payment is made on time, it is important that it is made to the right bank account. HMRC changed their bank accounts in 2009 from the Bank of England to Citi and the Royal Bank of Scotland. The correct bank details are as follows: Payment made electronically using BACS, internet or telephone banking or CHAPS Accounts office Sort code Account number Account name Cumbernauld HMRC Cumbernauld Shipley HMRC Shipley Page5

6 Payment made by Bank Giro only Payments made by Bank Giro must be made using one of HMRC s new payslips, which show NATWEST BANK PLC, COLLECTION ACCOUNT on the front rather than the old ones showing Bank of England. PENALTIES FOR LATE PAYMENTS For 2010/11 onwards, penalties may be charged if PAYE is paid late. The penalty regime comprises a number of elements: a percentage of tax paid late where at least two payments were late during the tax year; and additional penalties for amounts still outstanding six months and 12 months after their due date. Penalties are also charged for late paid Class 1A National Insurance contributions and where payments due under a PAYE settlement agreement are made late. PENALTIES FOR MONTHLY OR QUARTERLY PAYMENTS OF PAYE The penalty that is charged depends on the number of times that payment has been made late during the tax year. As a result, the penalties are not levied until after the end of the tax year. A penalty is not triggered until an employer has made at least two late payments during the tax year. An employer is allowed one `penalty free late payment each tax year, provided that payment is made no more than six months late. Thereafter the penalty charged depends on the number of times payment was made late during the year. HMRC policy is to send a letter the first time that a payment is made late, warning the employer that a penalty may be charged if they make any more late payments during the tax year. However, no further warning letters are send for any subsequent late payment. The onus is on the employer to ensure that payment is made on time. The penalty rates are shown in the table below. Number of late payments in tax year Penalty percentage 1 No penalty unless payment made more than six months late 2, 3 or 4 1% 5, 6 or 7 2% Page6

7 8, 9 or 10 3% 11 or more 4% PART PAYMENTS A payment is only treated as being made on time if the full amount of the payment is made by the deadline. This means that if part of the payment either reaches the Accounts Office or part of the funds clear HMRC s bank account after the deadline, the payment for that month will be treated as being made late for penalty purposes. It is therefore vital that care is taken to ensure the correct amount is paid each month as any shortfall resulting from a careless error when making the payment would be sufficient to trigger a default for late payment penalty purposes. END OF YEAR ADJUSTMENTS If a late payment penalty is to be avoided, it is important that the full amount is paid each month. A penalty may still be charged if the full amount for the year has been paid by 19 th or 22nd April following the year end, if taking each month in isolation there has been an underpayment for any particular month. This may be the case, for example, if the employer pays approximately the right amount each month and makes an adjustment at the year end. This approach could trigger a late payment penalty. It is therefore important that the amount of PAYE due each month is worked out correctly, rather than paying an estimate of the amount due. However, where an arrangement is in place, such as a modified PAYE arrangement under Appendix 6 of HMRC s Employment Procedures Manual, under which estimated PAYE is paid during the year and an adjustment made after the year end, a late payment penalty will not be charged as long as the terms of the arrangement are met. HOW THE PENALTY IS WORKED OUT The penalty is calculated by applying the penalty rate (as found from the table above depending on the number of times payment was made late during the tax year) by the total amount paid late, excluding the amount relating to the first late payment. Example During 2010/11 an employer pays his PAYE late on four occasions as follows. Payment is made by cheque. Page7

8 PAYE month Payment due Date paid Amount paid late 3 19 July August , August September , December January , March March ,200 Four payments are made late during the year. Therefore the appropriate penalty rate is 1%. No account is taken of the first late payment. The amount paid late is respect of the second and subsequent defaults is 6,580 ( 2, , ,200). The late payment penalty is therefore (being 1% of 6,580). ADDITIONAL PENALTIES Additional penalties are charged for payments of PAYE which are outstanding six months after the due date. The additional penalty is 5% of the amount unpaid after six months. A further penalty of 5% is charged for the payments that are outstanding 12 months after the due date. Example An employer was due make a payment of PAYE of 12,000. The payment is made 13 months after the due date. The employer is charged a penalty of 600 (5%) six months after the due date and a further penalty of 600 (5%) 12 months after the due date. INABILITY TO PAY In the event that an employer is genuinely unable to meet a payment of PAYE, he or she should contact HMRC s Business Payment Support Service on Ideally, this should be done as soon as the employer becomes aware that meeting the payment might prove difficult and before the date on which the payment is due. Where this action is taken and a time to pay arrangement is agreed with the Business Payment Support Service, provided that the employer meets the terms of the time to pay arrangements, a late payment penalty will not be charged for missing the payment deadline. Page8

9 REASONABLE EXCUSE FOR FAILURE TO PAY A penalty is not charged where a payment is made late but HMRC accept that there is a reasonable excuse for the late payment. HMRC accept that the following may constitute a reasonable excuse: the death of a close relative or domestic partner around the time that the payment was due; loss of the payment due to unforeseen circumstances such as a fire or a flood; serious illness of the person concerned or of a relative around the time that payment should have been made. However, HMRC do not accept the following excuses as reasonable and where payment is made late as a result, a penalty may be charged: pressure of work; lack of information; lack of reminder from HMRC; and ignorance of basic law. Lack of money (but see Inability to pay) and relying on someone else to make the payment are generally not accepted as being a reasonable excuse. Where the employer believes that he or she has a reasonable excuse for making the payment late, he or she should contact the HMRC office that imposed the penalty. NIL PAYMENTS Where no PAYE is due for a particular month or quarter, it is important to notify HMRC that this is the case before the normal payment date. This can be done online at the HMRC website. PENALTY NOTIFICATION Where a late payment penalty is due, HMRC will send out a late payment penalty letter setting out the amount of the penalty and when the penalty must be paid by. Penalty letters are sent out after the end of the tax year to which they relate. HMRC has a window of two years after the late payment in which to issue a penalty. Page9

10 RIGHT OF APPEAL Where a penalty is charged but the employer disagrees with the penalty, a right of appeal exists. An appeal can be made where the employer thinks that either no penalty is due or that the amount of the penalty is wrong. An appeal can also be made against a decision by HMRC to accept a reasonable excuse for failing to make a payment on time. Guidance on appeals can be found on the HMRC website. Page10

11 FACTSHEET CONTENT DISCLAIMER Whilst every effort has been made to ensure the accuracy of material appearing on this website, persons entering into transaction on the basis of information contained on the website should seek the services of a competent professional adviser as the information is published on the website on the understanding that Writetax Ltd is not rendering tax, legal, accounting or other professional advice. Writetax Ltd and Writetax Consultancy Services Ltd expressly disclaim all and any liability to any persons, whether a subscriber or a reader of this website or not, in respect of anything, and of the consequences of anything done, or omitted to be done, by such a person in reliance, wholly or in part, upon any material published on this website. For details of Writetax Consultancy services, contact Sarah Bradford on or by at info@writetax.co.uk. Page11