Late payment of PAYE: how can your company avoid fines?

Every UK business must manage Pay As You Earn (PAYE), the system for deducting income tax and National Insurance from employees’ wages. Failing to do so can lead to costly penalties, interest charges, and, in severe cases, legal action. 

Learn how HMRC late payment penalties work, how they’re calculated, and what to do if you’re charged. And if you need help reducing your risk of payroll tax penalties, discover how ADP can help. Our payroll management systems can help you minimise the risk of penalties, with fully compliant, automated processes and expertise from payroll specialists.

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What is the penalty for late payments on PAYE?

The penalties for late payment are fines issued by HM Revenue and Customs (HMRC) on businesses that fail to make PAYE payments on time or by the deadline given.

The total amount charged as a penalty can vary significantly depending on: 

• The number of times payments are processed late (in a given tax year)
• The amount of tax due
• How late the payment is made.

How much is the HMRC fine?

The HMRC fine for PAYE payments will be based on how often your company has made late payments during the tax year (between 1-4%). Additional fines will be added at 6 months and 12 months past the due date if the amount remains unpaid. You must also pay daily interest on the amount owed.

The first late payment in a tax year does not count as a default. However, subsequent late payments in the same tax year carry increasing penalty percentages:

• 1–3 late payments = 1% of the unpaid amount
• 4–6 late payments = 2%
• 7–9 late payments = 3%
• 10 or more late payments = 4%

If the amount owed hasn’t been paid after six months, HMRC will charge an additional 5% penalty. Another 5% will be added after 12 months of the debt remaining unpaid.

HMRC also charges daily interest on the unpaid amount, from the payment due date until the debt is settled. This means the longer the payment is delayed, the higher the cost. There are two interest rates, which are tied to the Bank of England’s base rates.

Here are the interest rates set from 9 January 2026: 

• Late payment interest rate is 7.75%
• Repayment interest rate is 2.75%

Which payments are subject to PAYE late penalties?

HMRC can charge late payment penalties on any PAYE amount that is not paid in full and on time. These PAYE late payment fines can apply to: 

• Regular PAYE payments: Monthly, quarterly or annual payments covering income tax and National Insurance deducted from employees’ wages.
• Student loan deductions: Amounts taken from employees’ pay and passed to HMRC to repay student loans. 
• Construction Industry Scheme (CIS) deductions: Tax deductions taken from payments to subcontractors in the construction industry.
• Class 1 National Insurance contributions (NICs): National Insurance paid on employees’ earnings by both employers and employees.
• Annual employer NICs (Class 1A and Class 1B): National Insurance paid by employers on benefits in kind (BiKs) and certain expenses. 
• HMRC tax determinations: Estimated PAYE amounts set by HMRC when they believe additional tax is owed or records are incomplete.
• HMRC decisions on NICs: Official rulings on whether NICs must be paid and how much is due. 

Common reasons for late PAYE payment penalties

Companies can incur late payroll tax penalties for several reasons, such as administrative or payroll errors, cash-flow or financial difficulties, and missed or late submissions to HMRC. Understanding these payroll challenges can help you avoid costly PAYE late payment fines. 

Reasons for late payments that may result in penalties: 

• Payroll or administrative errors: Mistakes in calculations, missed submissions or internal miscommunication.
• Poor payroll systems or software issues: Glitches, outdated payroll software or failures in third-party payroll management systems. 
• Lack of staff training: Untrained payroll or HR staff may submit incorrect data or miss deadlines.
• Cash-flow or financial difficulties: Companies struggling financially may delay payments.
• Late or incomplete submissions: Missing or inaccurate RTI filings to HMRC (FPS/EPS), or late/short PAYE/NIC payments. 
• Changes in employment status: Delays can occur if payroll records aren’t updated promptly when employees are terminated or on leave, or when new talent is acquired.
• Misclassification: Misclassifying employees or other careless reporting.

Late payments may be exempt from penalties under certain circumstances e.g., special arrangements for year-end adjustments (e.g., IR35 or Employment Procedures Appendix 6), if you adhere to the formal arrangements. Late payments due to bank or processing delays can typically be appealed.

How to avoid late payroll tax penalties

There are several ways to avoid late payroll tax penalties. Key methods include using a reliable automated payroll system, setting up reminders for tax deadlines and training staff to manage payroll accurately. 

• Use a reliable automated payroll system. Payroll software automates calculations and submissions and reduce errors. 
• Set up reminders for tax deadlines. Automated alerts help you stay on top of upcoming submissions, keeping both HMRC and employees happy. ADP payroll software provides automated alerts for upcoming tax deadlines, so you’ll never miss a beat. 
• Train payroll staff. Ensure staff understand processes, deadlines, and tax updates.
• Keep accurate employee records. Update all hires, leavers, pay changes, and employee benefits promptly to avoid submission errors. 
• Reconcile payroll before each submission. Double-check totals for PAYE, NICs, and other deductions to prevent underpayments.
• Conduct regular audits. Review payroll systems, processes and outputs to identify and fix errors quickly.
• Plan for peak periods. Schedule extra checks or support during high-volume times like year-end or bonus payments.
• Maintain contingency plans for banking issues. Ensure you have backup accounts or make early payments to avoid delays caused by holidays or banking errors.
• Separate payroll responsibilities. Cross-checking by multiple staff avoids a single point of failure, making it easier to spot errors. 
• Keep payroll processes updated. Address audit findings, system updates, or regulatory changes with up-to-date policies.
• Consider using a payroll provider. Outsourcing payroll providers ensure submissions are accurate and timely. 
• Monitor HMRC communications. Act quickly on queries or reminders to avoid escalating penalties.
• Appeal penalties if necessary. If a fine is issued and you disagree with the decision, you can appeal to HMRC directly or with support from a professional payroll body. In some cases, payment of the penalty can be paused until the investigation is complete. 

What happens if you cannot pay PAYE?

If your business is unable to pay PAYE, consequences may include late payment fines and legal action. Early communication and transparency with HMRC can help minimise financial and reputational damage. 

Here’s what to expect if you fail to pay PAYE and allow the situation to escalate: 

• HMRC reminders: You’ll get automated notices urging you to pay the outstanding PAYE.
• Repayment arrangements: HMRC may allow instalments via a Time to Pay agreement.
• Late payment penalties: Fines increase more depending on your company’s history of defaults and the longer the debt remains unpaid.
• Interest charges: HMRC adds daily interest until the balance is cleared. 
• Escalating enforcement: Continued non-payment can lead to warning letters, debt collection, or direct bank recovery of your company accounts. 
• Legal action: HMRC can file a Winding-up Petition (under the Insolvency Act 1986), potentially forcing your company into liquidation. 
• Credit impact: Late payments may be recorded on the company’s credit history as arrears, which may make it harder to borrow money or get trade credit.
• Operational impact: Non-compliance may impact relationships with partner organisations by breaching financial clauses in contracts. 
• Tax relief eligibility: Outstanding liabilities may affect eligibility for certain tax reliefs as HMRC may offset them against your debts.

Can we delay an employee’s pay?

Employers must pay employees on the pay day agreed in the employment contract — if you need to delay pay, you must first have agreement from the employee. If you delay pay without consent, you may breach employment law, depending on the circumstances: 

• Short delays (a few days) may happen due to payroll errors, banking issues, or processing problems, but these should be corrected promptly.
• Extended delays may be a breach of contract. Employees may have legal recourse through ACAS.

No matter how delayed payment is to an employee, you remain responsible for all wages owed to the employee and any tax, interest or penalties owed to HMRC. 

What to do if your business sends a late payment of PAYE

If you realise a payment is late, it’s important to identify how much you owe and communicate with HMRC promptly to minimise fines and reputational risk.

Take the following steps to resolve late PAYE: 

1. Calculate the outstanding amount

Start by confirming exactly how much PAYE is owed. Check your payroll records, Full Payment Submissions (FPS) and Employer Payment Summaries (EPS) to identify any underpaid tax, NICs or payroll deductions. Include any interest or penalties already applied by HMRC so you know the full balance that needs to be settled. 

To calculate PAYE arrears accurately, many businesses consult a payroll provider or tax adviser, who can model penalties and interest correctly and confirm the full amount owed to HMRC. 

2. Communicate with tax authorities

Contact HMRC as soon as the late payment occurs and be open about why this happened. Early, transparent communication can improve your chances of reducing penalties or agreeing a payment plan. 

If you can’t pay in full, discuss options such as penalty reductions or a Time to Pay arrangement. Prepare key documents in advance, including payroll records and financial statements, and clearly explain how you’ll avoid future late payments. 

3. Quickly pay the overdue amount

Pay the overdue amount as early as possible to minimise penalties and interest charges. Paying swiftly can demonstrate that you’re acting in a respectful, compliant manner. This will help your case while you negotiate with HMRC. 

Paying promptly can simplify your next payroll cycle by reducing arrears and reconciliation work. This can help lower the chance of compounding payroll admin issues. Keep in mind that RTI filing errors may still need correction. 

4. Review your payroll processes

Audit your payroll processes to identify what caused the delay and prevent it from happening again. Consider updating internal policies, upskilling staff or using payroll software to automate calculations, submissions and deadline tracking. 

If you already have payroll software and consistently encounter errors, it may be time to switch to a new payroll provider. Alternatively, fully outsourcing payroll to a specialist provider can remove the administrative burden entirely, ensuring PAYE is processed accurately and on time while keeping you compliant with HMRC requirements. 

Get help from ADP and reduce your risk of payroll tax penalties

Keeping on top of payroll is essential for avoiding penalties and maintaining compliance with HMRC’s ever-changing regulations. It ensures your employees are paid accurately and on time, first time, helping you maintain a strong reputation with your staff and other stakeholders.  

Businesses like yours can minimise the risk of costly payroll penalties by taking advantage of ADP's payroll specialists and services. We offer a range of award-winning payroll solutions to suit businesses of all sizes and geographies. Choose ADP for accurate submissions, timely payments and full compliance with HMRC. 

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