HMRC debt can feel easier to put off than other bills. There may be no supplier calling every day, no landlord at the door, and no immediate threat that trading will stop tomorrow.
In reality, however, tax arrears rarely stand still. HMRC late payment interest, penalties and missed payment arrangements can all worsen your company’s financial position over time. If the business is already under pressure, waiting too long can also reduce the options available to you.
HMRC Late Payment Interest: What It Means
HMRC late payment interest is the interest HMRC charges when tax is paid after the due date.
It can apply to several types of tax, including VAT, PAYE, Corporation Tax, Income Tax, National Insurance and Self Assessment. It is not a one-off charge. It usually runs from the date the payment became overdue until the tax is paid in full.
The current HMRC late payment interest rate is 7.75% from 9 January 2026. This is linked to the Bank of England base rate, with the calculation being the base rate plus 4% from 6 April 2025.
That means a tax debt can become more expensive even before any further penalties, new tax bills or enforcement costs are added.
For example, if a company owes £25,000 in tax arrears, interest at 7.75% would add around £1,937.50 over a full year if the balance stayed unpaid. That is before any VAT penalties, Self Assessment penalties or new liabilities that may fall due.
If your company is dealing with corporation tax arrears, this is why the timing matters. A debt that already feels difficult can become harder to manage each month it remains unresolved.
Why HMRC Tax Arrears Can Grow Quickly
Tax arrears often snowball. First, there is the original tax. Then interest starts to run. Later, penalties may apply. At the same time, more tax can become due for the next quarter, month or year.
This can create a cycle that is hard to break:
- the old HMRC debt remains unpaid
- new VAT, PAYE or Corporation Tax becomes due
- interest continues
- penalties may be added
- HMRC begins to lose confidence in repayment promises
- cash flow becomes tighter
Delaying does not usually protect the business. Indeed, it can make the problem bigger and more urgent.
If you are already managing HMRC debts, the aim should be to understand your position as early as possible. That includes what is owed now, what will become due soon, and whether the business can realistically keep up.
If you’re struggling with HMRC arrears, it may be time to get advice from a licensed insolvency practitioner. Call Anderson Brookes today on 0800 1804 935 or email advice@andersonbrookes.co.uk.
The Extra Cost of Missing Deadlines
Interest is only one part of the issue. Penalties can add another layer of cost.
The rules vary depending on the tax involved, but the overall message is simple. The longer a tax bill remains unpaid, the more expensive it may become.
VAT Late Payment Penalties
For VAT accounting periods starting on or after 1 January 2023, HMRC’s VAT late payment penalty system is based on how overdue the payment is.
- If VAT is up to 15 days overdue, there is no first or second late payment penalty. However, late payment interest can still apply from the first day the VAT is overdue.
- If VAT is 16 to 30 days overdue, a first late payment penalty is charged at 3% of the VAT outstanding at day 15.
- If VAT is 31 days or more overdue, the first penalty increases. It is calculated at 3% of the amount outstanding at day 15, plus 3% of the amount still outstanding at day 30. A second penalty also starts from day 31, calculated daily at an annual rate of 10% on the outstanding balance.
This is where delay becomes especially costly. The debt does not just sit there. It can gather interest and penalties while the business is still trying to deal with day-to-day pressure.
Self Assessment Late Payment Penalties
For Self Assessment, HMRC charges late payment penalties of 5% of the unpaid tax at 30 days, 6 months and 12 months. Interest is also charged on the amount owed.
For someone already struggling with personal or business cash flow, that can be a serious extra burden. It can also cause stress if you are trying to support a company, pay household bills and manage tax arrears at the same time.
If you can’t pay tax, the worst step is usually to ignore it. The earlier you look at the options, the easier it is to work out what is realistic.
Time to Pay: Check Affordability
A Time to Pay arrangement is an agreement with HMRC to pay tax arrears in instalments.
This arrangement may give breathing space and help stop the debt escalating as quickly. Your payment plan will be based on what is affordable, and it may ask about income, spending, assets and other debts when deciding whether to agree one.
Importantly, though ,Time to Pay is not a debt write-off. It does not make the tax disappear. Interest can still apply, and the arrangement must be kept up.
This is why affordability matters.
A payment plan that looks acceptable for the first month may fail if it leaves no room for wages, rent, suppliers, living costs or new tax bills. If a Time to Pay arrangement is missed, HMRC can cancel it. For VAT, missed conditions can mean that penalties are charged as if the arrangement had never existed.
Before agreeing to a payment plan, ask yourself:
- Can the payment be made every month?
- Can new tax be paid on time as well?
- Is the business still making losses?
- Are other creditors also overdue?
- Would the plan rely on personal borrowing or family support?
If the answer to these questions is unclear, it is sensible to take advice before making promises to HMRC.
How Delay Affects Insolvency Options
A business may be insolvent if it cannot pay its debts when they fall due, or if its liabilities are greater than its assets. One of the clearest warning signs of insolvency is HMRC debt. This is because tax is money that should have been set aside.
Once a company is insolvent, the position changes. Directors need to think carefully about creditor interests, not just keeping the business going for as long as possible.
Delay can make this harder. It may mean the company continues trading while debt increases. It may mean paying some creditors while being unable to pay others.
You may need to use personal funds support a business that cannot recover. Meanwhile, HMRC may move from reminders and payment requests to more formal enforcement.
If you are unsure whether the company can recover, early advice on UK insolvency can help you understand the line between temporary pressure and a more serious financial position.
This does not always mean liquidation. Sometimes a realistic repayment plan, cost reduction or restructuring may be possible. But you need clear numbers first.
Why Ignoring HMRC Enforcement Letters Is Risky
HMRC will usually contact you before taking further action. The letters may feel uncomfortable, but you should not ignore them.
If tax remains unpaid and no agreement is reached, HMRC can take steps to recover the debt. This may include using debt collection agencies, taking money directly from some accounts, using enforcement agents, taking court action or starting insolvency proceedings in some cases.
The earlier you respond, the more control you are likely to have.
At Anderson Brookes, we often speak to people who have waited because they hoped the next contract, invoice or trading month would fix the problem. Sometimes it does. But when it does not, the delay can leave fewer choices.
The point of taking advice is not to make a rushed decision. It is to understand what your options are before HMRC action forces the issue.
Closing a Company with HMRC Debts
If a limited company cannot pay HMRC and cannot recover, it may still be possible to close it properly.
A company with unpaid tax debts should not normally be dissolved through a simple strike-off if it is insolvent. HMRC can object, and directors may create more problems by trying to close the company in the wrong way.
A Creditors’ Voluntary Liquidation, often called a CVL, is a formal process used to close an insolvent company. It must be handled by a licensed insolvency practitioner. The company’s debts, including HMRC debts, are dealt with through the liquidation process.
This can help stop creditor pressure and bring the company’s affairs to an orderly close. It can also help directors show that they acted responsibly once they knew the business could not continue.
If you are thinking about closing a company with HMRC debts, get advice before taking action. The right route depends on whether the company is solvent, what assets it has, what debts are owed and whether any director guarantees or conduct issues need to be considered.
What to do if you cannot pay HMRC
- Start with the facts. Guessing often makes the stress worse.
- Check what is owed. Look at VAT, PAYE, Corporation Tax, Self Assessment and any penalties or interest. Then check what will fall due next. A debt that looks manageable today may not be manageable if another tax bill is due next month.
- Next, avoid making promises you cannot keep. HMRC may be willing to consider instalments, but a failed arrangement can make the position worse. A realistic plan is better than an optimistic one.
- Be careful with personal money. Using savings, credit cards or family loans to pay company tax arrears may feel like the right thing to do, but it can leave you personally exposed if the business still cannot recover.
- You should also avoid paying creditors at random. If the company is insolvent, paying one creditor while leaving others unpaid can create issues later.
- A practical first step is to speak to a licensed IP. A licensed insolvency practitioner can review the position and explain whether repayment, restructuring, liquidation or another route is likely to be appropriate.
FAQs About HMRC Interest and Penalties
Does HMRC late payment interest stop if I agree Time to Pay?
Usually, no. Interest can still apply while tax is being repaid. However, a Time to Pay arrangement may help manage the arrears and may reduce or avoid some penalties if it is agreed and maintained in time.
Can HMRC reduce the tax I owe?
In most cases, HMRC expects tax to be paid in full. A payment plan usually spreads the debt rather than reducing it. If a company enters liquidation, HMRC is treated as a creditor within the formal insolvency process.
Will HMRC make my company insolvent?
HMRC can take enforcement action if tax is not paid and no acceptable arrangement is in place. In serious cases, this can include winding-up action. Early advice may help you act before that happens.
Can I close my company if it owes HMRC?
Yes, but it needs to be handled properly. If the company is insolvent, a formal liquidation may be needed. A simple strike-off is usually not suitable where the company has unpaid debts.
Should I wait until HMRC takes action?
No. Waiting can increase interest, penalties and pressure. It can also reduce your options. Getting advice early does not force you into insolvency. It helps you understand the safest route.
Don’t Delay: Get Help Now
HMRC late payment interest, penalties and arrears can build quickly. If the business is already under strain, delay can make the position harder to rescue and harder to close in an orderly way.
You do not need to wait for enforcement action, a failed payment plan or another tax bill you cannot pay.
At Anderson Brookes, we give clear, confidential advice without judgment. We can help you understand whether repayment, recovery or formal insolvency is the right route.
If you are worried about HMRC debt, speak to Anderson Brookes today and get advice from a regulated insolvency team that deals with these situations every day. Call 0800 1804 935 or email advice@andersonbrookes.co.uk.