What Happens When you Don’t Pay Taxes on Time?

With household bills continuing to rise, many taxpayers may struggle to pay their tax bill on time. If this applies to you, the worst thing you can do is ignore the issue or delay taking action.

HMRC may charge interest and penalties for late payment, depending on how late you pay and what type of tax you owe. However, you may be able to arrange a payment plan with HMRC to pay what you owe in instalments, depending on your circumstances.

This guide explains what happens if you don’t pay taxes in the UK, the difference between late filing and late payment, what penalties and interest may apply, and what you can do if you can’t afford to pay HMRC.

What are Late Tax Payment and Late Tax Return?

You need to know that late payment and late filing are two different issues.

Late tax payment is when you don’t pay the tax you owe by the payment deadline. On the other hand, late tax filing means you have not submitted your tax return by its filing deadline.

Note that you can potentially face consequences for both if you submit your return late and fail to pay the tax on time.

For instance, a Self Assessment taxpayer could submit their return after the deadline and also pay the resulting tax late. The filing and payment rules need to be considered separately.

What Happens if You Don’t Pay Taxes On Time?

If you miss a tax payment, HMRC may charge interest on the full amount, consider a late-payment charge, contact you about the unpaid tax, and take debt-recovery action if the debt remains unpaid.

Remember, the exact consequences depend on the tax involved. No single late-payment penalty applies to every UK tax. Therefore, it is important to check the rules for the specific tax you have to pay.

What Happens If You Pay Self Assessment Tax Late?

If you do not pay your self-assessment tax by the deadline, HMRC may charge you interest and late-payment penalties. For payments that remain unpaid, penalties can apply at 30 days, 6 months and 12 months after the payment deadline. For self-assessment, a late-payment penalty can typically be charged at:

• 30 days late: 5% of the tax you owe
• 6 months late: a further penalty of 5% of the tax unpaid
• 12 months late: another penalty of 5% of the tax unpaid

Interest can also be charged on unpaid tax. However, there are specific rules and exceptions. Therefore, the amount you ultimately owe depends on your circumstances and the amount of tax outstanding.

Note: You should also make sure you file your Self Assessment tax return by the deadline to avoid potential penalties.

For Instance:

Let’s suppose you have a Self Assessment tax bill of £2,000 and you do not pay it on time.

A 5% late-payment penalty would be £100 (if the relevant 30-day penalty applied).

If the tax remains unpaid, further penalties may arise. This example is for illustration only. It does not include interest or other possible charges.

Let’s understand what happens if you don’t pay taxes like VAT, PAYE and Corporation Tax.

What Happens If You Pay Corporation Tax Late?

In the UK, companies must pay Corporation Tax by the applicable payment deadline. If you are a company with taxable profits of £1.5 million or less, your Corporation Tax is due 9 months and 1 day after the end of the accounting period.

Different rules apply to larger UK companies, including instalment payment arrangements in certain circumstances. Moreover, if Corporation Tax is paid late, HMRC can charge interest on the unpaid amount.

You should also remember that the Corporation Tax payment deadline and CT600 filing deadline are different.

For most companies, the CT600 return is due 12 months after the accounting period ends. So, missing one deadline does not automatically mean you have missed the other.

Important: You should also make sure you file your Corporation Tax return by the deadline to avoid potential penalties.

What Happens If You Pay VAT Late?

When you search “what happens if you don’t pay taxes,” it includes VAT too. VAT has a separate late-payment penalty system in the UK.

For VAT accounting periods beginning on or after 1 January 2023, the amount of the late-payment penalty depends on how late the payment is and whether previous penalties have applied.

Additionally, late-payment interest can be charged from the date the payment became overdue. Therefore, the VAT penalty system is different from the Self Assessment system.

So, if your business is behind with VAT payments, check the specific amount shown on your HMRC account and deal with the debt promptly.

What Happens If You Pay PAYE Late?

If you operate PAYE, you generally have two separate obligations: reporting payroll information to HMRC through Real Time Information (RTI) and paying the PAYE and National Insurance amounts due by the relevant payment deadline. Late payment of PAYE can result in interest and penalties.

However, it is important to distinguish between filing payroll information late, paying PAYE late, and both filing and payment being late. In the UK, an employer can remain responsible for PAYE obligations even when payroll processing has been outsourced to an accountant or payroll provider.

If you are experiencing difficulties paying PAYE, contact HMRC as soon as possible rather than allowing arrears to build up.

Can HMRC Charge a Penalty for Paying Tax Late?

Yes, HMRC can charge a penalty for paying tax late, but the penalty depends on the type of tax and the circumstances. So, it is incorrect to say that every late tax payment automatically receives the same percentage penalty.

A taxpayer should check the rules applicable to their particular tax liability rather than relying on a general percentage.

What If You Cannot Pay Your Tax Bill?

Now that you know what happens if you don’t pay taxes, let’s discuss what happens when you cannot pay your tax bill on time. If you cannot afford to pay your tax bill, do not simply ignore HMRC.

Depending on the amount you owe and your circumstances, you may be able to set up a payment plan to pay it in instalments.

This allows eligible taxpayers and businesses to spread their payments over an agreed period. Also, HMRC considers your circumstances before agreeing an arrangement, and interest can continue to apply to the outstanding tax.

Furthermore, you should continue to submit any tax returns that are due, even if you cannot afford to pay the resulting tax bill.

What Happens If You Continue Not to Pay HMRC?

If a tax debt remains unpaid and you do not agree an acceptable payment arrangement with HMRC, the department can take steps to recover the debt. Depending on the circumstances, this can include formal debt-collection and enforcement action.

This is why contacting HMRC early is generally preferable to allowing tax arrears to continue accumulating. A Time to Pay arrangement may be available where HMRC is satisfied that you cannot pay the liability in full by the due date and can afford the proposed payments.

What Is a Time to Pay Arrangement?

A Time to Pay arrangement is an agreement with HMRC that allows UK taxpayers to pay an outstanding tax debt in instalments rather than paying the full amount.

Whether you can use one depends on the type and amount of tax owed, your financial circumstances, and your payment history. It also depends on whether you have filed the required returns and HMRC’s assessment of your ability to pay.

How Can an Accountant Help With Tax Arrears?

It is important to understand that an accountant cannot remove a tax liability simply because you are unable to pay it. However, they can help you deal with the situation.

Depending on your circumstances, an accountant may be able to review your outstanding tax liabilities, check whether tax returns have been filed correctly, and calculate amounts owed. They can also help you plan future tax payments and make sure upcoming filing and payment deadlines are not missed.

So, if you need an accountant to manage your tax affairs, use our platform, Accounting Firms. We help you find the best accountants within just a few minutes.

Final Thoughts

Understanding what happens if you don’t pay taxes is important, as it can help you understand the potential costs of late payment and take action sooner.

If you do not pay your tax on time, you may face late-payment penalties and interest depending on the type of tax involved. If you cannot pay the tax in full, do not ignore the bill. Contact HMRC as soon as possible and check whether you can arrange a payment plan.