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Payroll Tax Penalties – Who Pays Them, and How to Avoid Them?

Paying payroll taxes on time is important, but there are penalties for late payments. Who pays them? What are they called? How can you avoid them?

Text PAYROLL TAX on background Business man at office closeup

The HMRC (Her Majesty’s Revenue and Customs) has a list of all the penalties that can be applied to businesses that don’t pay their taxes on time. There are two types of penalties: One is an interest penalty, which will accumulate at 8% per annum; The other type of penalty is an additional fixed amount. For example, £100 per day where the employer has not complied with its obligations under PAYE regulations. It also applies to employers who have failed to keep records or submitted incorrect reports to HMRC about employees’ earnings and National Insurance contributions.

Payroll Deductions

As an employer, you need to make monthly payments to your employees in the form of salary as well as bonuses, maternity pay or statutory sick pay, if applicable. From there, you are also required to deduct tax and national insurance for the majority of your employees. You may also be required to deduct pension contributions, student and postgraduate loan repayments, child maintenance and Payroll Giving donations.

Income tax

Income tax from your employees must be deducted via the Pay As You Earn (PAYE) scheme using your employee’s tax code. The amount to be deducted depends on how much each employee earns.

The current tax thresholds are the following:

  • Personal allowance of up £252 per week/£1,048 per month/£12,570 per year – 0%
  • Basic tax rate above PAYE threshold and up £37,700 – 20%
  • Higher tax rate from £37,701 to £150,000 – 40%
  • Additional tax rate of above £150,000 – 45%

National Insurance Contributions

NICs of employees are also referred to as primary contributions. Like employees’ income tax, employers must deduct NICs via PAYE using each employee’s National Insurance category letter.

Employer obligations

Employers must pay HMRC the National Insurance contributions and tax deducted from employees’ salaries and wages. As an employer, another obligation you have is to make sure that you issue a payslip that shows your employees’ tax and national insurance deductions.

HMRC Penalties for Late Payment of Payroll Taxes

Penalties will be incurred by companies that fail to pay tax and insurance contributions of employees on time or in full amount.

So how much are the penalties usually? This is based on the number of defaults, or deliberate errors in filing, for a given year. A penalty percentage is applied per number of defaults. Note that if it’s your first time failing to pay on time, this will not be considered a default.

Here are the current penalties for late monthly and quarterly PAYE payments: 

  • If the number of defaults in a given tax year is 1-3, the penalty percentage applied is 1%.
  • If the number of defaults is 4-6, the penalty percentage is 2%.
  • For 7-9 defaults, you’ll incur a 3% penalty.
  • For 10 or more defaults, a 4% penalty percentage will be applied to the amount you have to pay.

Making the PAYE payments as early as possible is crucial since daily interest will accrue on all your unpaid amounts.

Additional penalties

  • You will incur penalties if what you pay is less than the actual amount due.
  • An additional 5% penalty will be charged if you fail to pay the monthly/quarterly payments after 6 months.
  • You’ll be charged another 5% penalty if, after 12 months, you still haven’t paid the monthly/quarterly payments.

Who Pays the Penalties for Late Payments?

In general, the directors of a limited company are not personally liable for the failures of a company. However, it’s within HMRC’s authority to make them personally responsible for non-payment of taxes if there’s evidence of deliberate non-payment, neglect or fraud. 

If HMRC has reason to believe that unpaid taxes is a result of a deliberate, negligent or fraudulent act, it might then pursue company directors personally.

An instance of a deliberate act could be if a director continues to pay dividends while at the same time failing to make income tax payments. In this case, HMRC could make the director liable for the company’s debts. Another example would be if the company pays creditors but not the HMRC.

What Happens if You Get a Penalty?

If you fail to make PAYE payments on time, you’ll receive a notice from HMRC. This notice will cover how much you owe the HMRC and how you can pay the unpaid amount. It will also include the steps you can take if you don’t agree with HMRC’s penalty decision.

You should pay what you owe to HMRC within a month or 30 days after you receive the notice. Keep in mind that daily interest can accrue if you fail to do so.

To appeal, you can use HMRC’s PAYE for Employers service. Some of the reasons you can list when you make your appeal are you no longer have any employees, information technology difficulty, paid on time, ill health, theft or crime and others.

Aside from appealing online, companies may also choose to submit their appeal in writing addressed to HMRC.

How You Can Avoid Payroll Tax Penalties

If HMRC already sent you a notice, you can appeal if you have a valid reason for failing to make the PAYE payments on time. If HMRC finds your excuse reasonable, it may consider and settle your appeal.

However, if you don’t have a valid reason, you will have to pay the corresponding penalties. To avoid this, payroll should be done accurately. Having a thorough understanding of how the system works can help minimise liabilities in the future. You can also set reminders way in advance to help you keep track of the deadlines. Alternatively, you can consider outsourcing payroll services.

Managing payroll can be time-consuming and challenging for any business owner. Outsourcing payroll services can help you save time and energy, allowing you to concentrate on your business more.  At Nigel B Butler Limited, we can help you run payrolls accurately and ensure that you make PAYE payments on time. Contact us today to learn more.

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