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HMRC internal manual

Debt Management and Banking Manual

Debt and return pursuit: PAYE RTI: penalties: late-payment penalties

Legislation introduced from 6 April 2010, stated that for tax years 2010-11 onwards, employers not paying PAYE in full or on time can be charged penalties. PAYE includes tax, National Insurance Contributions (NICs), Student Loans and Construction Industry Scheme (CIS) deductions. The penalties are raised in addition to statutory interest which is charged on late payments made during the tax year.

The penalty regime covers three penalties for PAYE; the:

  • late-payment penalty, which applies to any in year late paid periods (after the first late paid period) in a tax year which increases with every default
  • six-month penalty, which applies to any period in a tax year, or any annual charge, unpaid after six months
  • twelve-month penalty, which applies to any period in a tax year, or any annual charge, unpaid after twelve months.

The full legislation and amendments since it was introduced is contained within in the Schedule 56 legislation. The particular legislation for RTI late-payment penalties is contained in the Income Tax (Pay As You Earn) (Amendment No. 3) Regulations 2014 (web).

For tax years 2010-11 to 2013-14, penalties were raised manually using a risk-based approach.

The charging structure changed from 2014-15 to enable penalties to be issued automatically via ETMP. When automated penalties come into force on ETMP, a penalty will be issued on all occasions where more than £100 has been paid late or the penalty for the quarter is more than £75.

Up to and including 2014-15, penalties will be issued manually.

Penalties for 2015-16 are being issued via ETMP but on a risk-assessed basis and only after they have been reviewed to ensure they are appropriate.

ETMP charges that late-payment penalties apply to

  • Monthly, quarterly and annual PAYE payments incorporating tax, NICs, Student Loans and Construction Industry Scheme (CIS) deductions, net of any statutory payments; this includes charities unless they can prove they have an agreement
  • Class 1A NIC
  • PAYE Settlement agreements Section 8 decisions - NIC only

ETMP charges that late-payment penalties do not apply to

  • Periods covered by time to pay agreements applied for before the amounts became due and payable
  • Employers who have special arrangements (modified schemes) with HMRC
  • NIC holiday payments
  • If the amount paid late is under £100

The charging structure

The tables below shows the penalty rates for monthly, quarterly and annual payers.

For in-year PAYE, the first failure to pay on time (in other words, the first month or quarter in the tax year not fully paid on time), does not count as a default and is exempt from a late-payment penalty but if it is still unpaid six or twelve months later then six and twelve-months penalties can apply.

For employers paying their in-year PAYE annually, their first late payment would not be charged a late-payment penalty (as the first late payment in the year does not count as a default) but six and twelve-month penalties would still apply if the payment was very late.

No such exception applies to employers paying annual charges such as Class 1A NIC as they can be charged late-payment penalties. If they pay very late, six and twelve-month penalties can be charged.

Percentage rates

The tables below show the penalty rates for monthly, quarterly and annual payers.

Monthly payers

Number of late payments in a tax year Penalty percentage Amount to which penalty percentages apply
1 No late-payment penalty Please note that the first failure to pay on time does not count as a default.
2-4 1% Total amount that is late in the months defaulted.
5-7 2% Total amount that is late in the months defaulted.
8-10 3% Total amount that is late in the months defaulted.
11 and over 4% Total amount that is late in the months defaulted.

Quarterly payers

Number of late payments in a tax year Penalty percentage Amount to which penalty percentages apply
1 No late-payment penalty Please note that the first failure to pay on time does not count as a default.
2-4 1% Total amount that is late in the quarter.

Annual payers

Number of late payments in a tax year Penalty percentage Amount to which penalty percentages apply
Default does not apply No late-payment penalty unless paid over six and twelve months late, then 5% applies Employers who only make annual deductions of PAYE are allowed to pay annually. If they pay late, this would be their first failure to pay on time which effectively means they are only eligible to be charged six and twelve month penalties of 5% each. See ‘Annual payers’ section and examples 3 and 4 below for more information.

Class 1A NIC

Number of late payments in a tax year Penalty percentage Amount to which penalty percentages apply
Default does not apply 5% Total amount unpaid on the penalty date. Please note that the penalty date varies according to the type of payment.

Six month and twelve month penalties

Applies to Number of late payments in a tax year Penalty percentage Amount to which penalty percentages apply
All employers Any payment more six months late 5% An extra 5% of any amount unpaid after six months; for in-year PAYE, this applies to all periods including the first failure to pay on time.
All employers Any payment more 12 months late 5% A further 5% penalty of any amount unpaid after twelve months; for in-year PAYE, this applies to all periods including the first failure to pay on time.

Annual payers

By concession, employers are only allowed to pay annually if they are either:

  • a limited company and the only employees are directors who take an annual salary
  • unusually, employers who only pay their employees once a year.

Example of when penalty charges will apply

Employer paid months 1, 2, 3, 4, 5, and 6 thirteen months late, at the end of:

  1. quarter 1, the first default will not count so the employer will be charged 1% of the amount paid late in months 2 and 3
  2. quarter 2, the employer is charged 1% on the amount paid late in month 4 and 2% for the amounts paid late in months 5 and 6
  3. quarter 3, months 1, 2 and 3 will be six months overdue so a 5% penalty will apply to months 1,2 and 3
  4. quarter 4, months 4, 5 and 6 will be over six months old so a 5% penalty will be charged on these amounts
  5. quarter 1 for the following year, months 1, 2, 3 will be charged a twelve-month penalty of 5%
  6. quarter 2 of following tax year, months 4, 5 and 6 will be due a twelve-month penalty charged at 5%.

If a specified charge is raised in the absence of an FPS, the penalty will be based on the specified charge.

Time to pay (TTP)

Legislation allows HMRC to suspended penalties for amounts included in TTP agreements (including payment promises) for the duration of the arrangement, providing the:

  • amounts included in the TTP were not already subject to penalties
  • employer makes payments on or before the dates agreed.

Penalties will be charged on amounts already overdue up to the date of the time to pay arrangement. They will not be charged from the date the employer requested a time to pay arrangement as long as they keep to the agreed terms. For example, TTP agreed for a debt that was already four months late and TTP will continue for the next nine months; late-payment penalties can be charged on the debt for the first four-month period, but six or twelve-month penalties will not apply because the employer agreed the TTP arrangement before these penalties became due.

If the:

  • employer fails to keep to the arrangement and the TTP is cancelled, penalties can be charged as if the arrangement did not exist
  • TTP arrangement has not been formally cancelled, you will have to treat the TTP arrangement as it if was adhered to.

ETMP default count

The default count starts at the beginning of each tax year. After the 22nd of each month, checks are made to see if a payment has been made on time. Where payment was either late, partially paid, not yet paid, or no nil Employment Payment Summary (EPS) was received, the default count will increase, and record a default note on the employer’s record (subject to a tolerance limit of £100). The first failure to pay on time does not count as a default.

PAYE late-payment penalty warning letter

A Generic Notification Service (GNS) message is issued after each default if the amount underpaid is £100 or less. There are two types of GNS message.

  • Type 1 – for the first three defaults
  • Type 2 – a stronger message for subsequent defaults

The wording can be found at GNS warning notices. For more information about GNS messages go to PAYE5055.

PAYE late payment penalty notices

The following charge notices apply to late-payment penalties.

  • RTI501 – notice of penalty assessment
  • RTI502 – Notice of amended Penalty
  • RTI503 – Penalty cancellation notice

Debt pursuit

Penalties have a statutory appeal period of 30 calendar days and if no appeal has been received and recorded on the Penalty Appeals Service (PAS) within that time, it becomes collectable. (This content has been withheld because of exemptions in the Freedom of Information Act 2000)

Once a penalty is in IDMS, ETMP will send details of any payments and charge amendments to IDMS daily.

How they appear on ETMP

Penalties issued for 2014-15 or before will appear on the AMC contract account with charge type PAYE Late Payment Penalty and were issued for a whole year at a time. (This content has been withheld because of exemptions in the Freedom of Information Act 2000)

Monthly penalties issued for 2015-16 are issued on a quarterly basis and appear as a “PAYE in Year LPP” charge on ETMP. (This content has been withheld because of exemptions in the Freedom of Information Act 2000)

(This content has been withheld because of exemptions in the Freedom of Information Act 2000)