Falling behind on PAYE is a major warning sign for any business. Unlike other liabilities, PAYE and National Insurance are deductions taken from employees’ wages and passed on to HMRC. When the business keeps that money to plug cash-flow gaps, HMRC treats it as a serious compliance failure.
Most directors who fall behind aren’t acting carelessly. They’re trying to keep staff paid, keep operations going and buy time until revenue improves. But PAYE arrears can escalate quickly, especially if other debts are building at the same time. Once HMRC begins chasing payment, the pressure often increases at speed.
If you’re struggling to pay PAYE, acting early is the most important step. There are clear routes to get control of the situation, and options to protect both the business and you as a director.
Step 1: File your payroll submissions on time
Even if you can’t pay the PAYE bill, always file your RTI (Real Time Information) submissions on time. This protects you in several ways:
- HMRC sees that you’re compliant and transparent
- Penalties for late filing are avoided
- HMRC gets accurate figures for any repayment plan
- Your payroll records remain correct for employees
Late filing and late payment together make HMRC much less flexible. Filing on time keeps the conversation open and shows you’re taking your responsibilities seriously.
Step 2: Identify why you can’t pay PAYE
Before you speak to HMRC, take a clear look at the business’s financial position. PAYE arrears rarely sit alone. Ask yourself:
- Is this a temporary cash flow dip?
- Has a client payment been delayed?
- Are VAT, suppliers or rent also overdue?
- Is this the second or third time PAYE has been difficult to pay?
- Is the business relying on PAYE money to run?
PAYE deductions legally belong to HMRC from the moment they’re taken from salaries. Using them to fund other outgoings is a sign that the business is running out of cash, and HMRC knows this. Understanding the real cause helps you choose the right next step.
Step 3: Contact HMRC early
HMRC is much more open to working with directors who contact them before enforcement begins. You can call the Business Payment Support Service to discuss short-term difficulty. They will expect:
- The PAYE amount owed
- A breakdown of your cash flow
- Expected income over the next few weeks
- Any other debts
- How much you can pay immediately
- How long you need to clear the rest
Be realistic when you propose repayment terms. HMRC will reject plans that are clearly unaffordable, and missing payments later can cause the agreement to collapse entirely.
Step 4: Request a Time to Pay (TTP) arrangement
A Time to Pay arrangement is the most common solution for short-term PAYE difficulties. It allows PAYE arrears to be repaid monthly, typically over 6 to 12 months, while keeping the business trading. HMRC is more likely to approve a TTP when:
- You approach them before missing the deadline
- You have a history of filing returns on time
- The company has stable cash flow to support instalments
- There are no other significant tax arrears
- The business looks viable
However, TTPs have limits:
- They are short-term
- Missing a repayment cancels the agreement
- They cover tax arrears only, not suppliers or lenders
- If other debts are growing, the business may still be insolvent
A TTP can buy breathing space. But it won’t usually fix a deeper structural cash flow problem. Our licensed insolvency practitioners can help you work out a plan that is affordable and sustainable or look at your alternative options.
Step 5: Check whether the company is already insolvent
In the UK, there are two tests that insolvency professionals will use to identify insolvency:
Cash-flow test – You can’t pay debts in full, when they fall due
Balance-sheet test – Your liabilities exceed assets
Struggling to pay PAYE consistently, especially if VAT, rent or trade creditors are overdue, is a strong indicator of cash-flow insolvency. Once a business is insolvent, your legal duty shifts. You must act in the best interests of creditors as a whole, not the company or shareholders.
Continuing to trade without a plan risks:
- Wrongful trading
- Personal liability
- PAYE being assessed as director misconduct in a later investigation
If PAYE arrears are part of a wider pattern, it’s time to seek professional advice.
Step 6: Explore formal business rescue options
If PAYE arrears are one symptom of a bigger financial problem, formal restructuring may give the business a better chance of survival than a TTP alone.
Company Voluntary Arrangement (CVA)
A Company Voluntary Arrangement can allow the business to repay debts, including PAYE and other HMRC liabilities, through a single, affordable monthly payment over several years. It:
Stops creditor pressure
Halts legal action
Keeps directors in control
Protects employees and trading
A CVA works best when the business is fundamentally viable but needs time to stabilise.
Administration
Administration provides immediate legal protection through a statutory moratorium. It’s used where:
- Jobs need protecting
- Contracts or assets have value
- A sale or restructure could save the business
PAYE arrears are included as part of the administration process, and HMRC cannot enforce repayment during the moratorium.
Creditors’ Voluntary Liquidation (CVL)
If the business has no realistic prospect of recovery, a Creditors’ Voluntary Liquidation may be the safest option. It:
- Closes the company in an orderly way
- Ensures all creditors are treated fairly
- Stops enforcement action
- Writes off unsecured debts (including PAYE) unless misconduct is found
A CVL can protect directors who act responsibly and seek advice early.
What happens if you ignore PAYE debt
PAYE arrears escalate more quickly than many directors expect because HMRC treats them as a priority debt. If you ignore the problem, HMRC can escalate to:
Penalties and interest: Charges increase the longer repayment is delayed.
Time to Pay refusal: Late engagement reduces your chance of securing an arrangement.
Debt collection agencies: HMRC can instruct collection firms to pursue the debt.
Enforcement officers (bailiffs): HMRC can seize company assets.
A statutory demand: This is often the final warning before legal action.
A winding-up petition: HMRC is the UK’s most frequent petitioner. If they issue a winding-up petition, the company could be forced into Compulsory Liquidation.
Once a petition is filed and public, bank accounts can be frozen and trading becomes extremely difficult.
Will I be personally liable for PAYE arrears?
Most of the time, PAYE arrears remain strictly a company debt. Directors are not automatically personally liable for debts to HMRC. However, personal risk increases if:
- PAYE was repeatedly deducted but not paid over
- The business continued trading while insolvent
- There was deliberate misuse of tax deductions
- The director ignored warning letters or failed to act
- Records are missing or payroll submissions were not filed
In formal insolvency, the licensed insolvency practitioner must review director conduct. Acting early, being transparent and taking advice helps demonstrate that you met your duties.
Key takeaways: What To Do If You Can’t Pay PAYE
- File payroll submissions on time even if you can’t pay
- Contact HMRC early. Timing affects how flexible they can be
- A Time to Pay arrangement can spread PAYE arrears over monthly instalments
- Repeated PAYE arrears usually signal wider cash-flow problems
- If you’re insolvent, you must act to protect creditor interests
- Options like CVA, administration or liquidation may provide better protection than a short-term TTP
- The earlier you act, the lower your personal and legal risk
Get advice on PAYE arrears
If you can’t pay PAYE and HMRC pressure is rising, early advice can make a huge difference. A licensed insolvency practitioner can assess whether the business can recover, whether HMRC is likely to agree to a payment plan or whether a formal solution would offer better protection.
Get in touch for free, confidential advice before HMRC escalates the situation. The sooner you act, the more options you keep.
