PAYE and NIC Arrears: Dealing With RTI Penalties and Late Payment Interest Effectively
Falling behind on PAYE or National Insurance is more common than many employers expect. Tight cash flow, changing payroll details, and the pace of Real Time Information reporting can turn small slips into arrears that attract daily interest and repeated penalties. Left unmanaged, debts can escalate to formal enforcement and disrupt day-to-day operations.
This guide explains, in plain terms, what counts as PAYE and NIC arrears, how HMRC calculates interest and penalties, and why timely, accurate RTI submissions matter. You will find practical steps to confirm what you owe, correct reporting errors, and prioritise payments. We also set out how to approach HMRC, what to expect from a Time to Pay arrangement, and the records you need to keep to avoid future issues.
Understanding PAYE and NIC Arrears
When you fall behind on Pay As You Earn (PAYE) or National Insurance Contributions (NIC), the unpaid amounts quickly accumulate interest and may attract penalties. These arrears usually arise from missed deadlines, errors in reporting, or financial difficulties, and they carry legal consequences that affect your responsibilities as an employer.
Definition of PAYE and NIC Arrears
PAYE arrears occur when you do not pay the income tax you deduct from your employees’ wages to HMRC on time. Similarly, NIC arrears arise when you fail to pay the required contributions for both employees and employers.
Both types of arrears represent debts owed to HMRC. They remain outstanding until cleared, regardless of whether payroll information has been submitted correctly through Real Time Information (RTI).
Interest is charged daily on any overdue balance, starting from the original due date until payment is made. In addition, late payment penalties may apply if you consistently miss deadlines or underpay. These charges increase the longer the arrears remain unpaid, making early resolution important.
Common Causes of Arrears
Arrears often result from cash flow problems, where your business cannot meet payment deadlines despite accurate reporting. This is common for smaller employers managing tight budgets.
Administrative errors also play a role. For example, submitting incorrect figures through RTI or failing to update payroll records can lead to mismatched payments and arrears. Even if you file on time, HMRC still applies penalties for late or incomplete payments.
Other causes include misunderstanding due dates, failing to set aside funds for liabilities, or overlooking additional charges such as Class 1A NIC on benefits. In some cases, arrears build up gradually when small underpayments go unnoticed until HMRC issues a demand.
Legal Implications for Employers
If you do not settle arrears promptly, HMRC has the authority to take enforcement action. This may include issuing penalties, charging interest, and escalating to debt collection measures.
Penalties are structured based on the number of late payments within a tax year. Repeated failures can lead to higher percentage-based fines, often starting at 1% of the outstanding amount and increasing with frequency.
HMRC can also pursue formal recovery methods, such as distraint over business assets or court action. In serious cases, failure to comply may damage your ability to access credit or enter into agreements like Time to Pay arrangements.
Staying compliant not only avoids financial penalties but also reduces the risk of legal disputes with HMRC.
Real Time Information (RTI) Requirements
You must send payroll information to HMRC electronically each time you pay employees. The rules set deadlines for reporting, require accurate data entry, and place obligations on employers to provide specific details in a timely manner.
RTI Submission Deadlines
You must submit a Full Payment Submission (FPS) to HMRC on or before the date you pay your employees. This applies whether you pay weekly, fortnightly, or monthly.
If you make payments outside your regular schedule, such as bonuses, you must still file an FPS on or before the payment date. Missing deadlines can trigger late filing penalties, which HMRC may apply immediately or after repeated failures.
In some cases, an Employer Payment Summary (EPS) is required, for example when no employees are paid in a period or when reclaiming statutory payments. Submitting the wrong type of return or failing to file an EPS when needed can also result in compliance issues.
Keeping track of payroll dates and aligning them with reporting deadlines helps avoid unnecessary penalties and interest charges.
Data Accuracy and Common Errors
Errors in payroll submissions often lead to HMRC queries or penalties. You must ensure that employee details such as National Insurance numbers, dates of birth, and pay figures are correct before filing.
Common mistakes include:
- Incorrect payment dates
- Duplicate submissions
- Wrong employee status (e.g. starter or leaver not flagged)
- Misreporting statutory payments or deductions
Once submitted, incorrect data can be difficult to correct and may affect employee tax and benefit records. HMRC requires you to submit an amended FPS or, in some cases, an EPS to fix errors.
Using payroll software with built-in validation checks reduces the risk of mistakes. Regularly reviewing employee records and reconciling payroll against HMRC notices (such as tax code changes) also helps maintain accuracy.
HMRC Reporting Obligations
RTI requires you to report more than just pay and tax details. Each FPS must include information on gross pay, tax deducted, National Insurance contributions, student loan deductions, and pension contributions.
You must also notify HMRC when an employee starts or leaves, using the RTI system instead of separate forms. This ensures HMRC updates employee records in real time.
Employers are responsible for keeping payroll records for at least three years. HMRC may request these records to check compliance. Failure to provide them can result in additional penalties.
If you operate PAYE for multiple payrolls or different pay frequencies, you must submit separate reports for each schedule. This makes it essential to manage payroll processes carefully to meet all reporting obligations.
Penalties for Late RTI Submissions
When you submit payroll information late under Real Time Information (RTI), HMRC can apply penalties that vary depending on the type of failure, how often it occurs, and whether the error is corrected quickly. Financial charges may also accumulate if the delay extends beyond certain time limits.
Types of RTI Penalties
HMRC issues penalties for late filing, late payment, and inaccurate submissions. The most common is the late filing penalty, which applies if your Full Payment Submission (FPS) is not sent on or before the employee’s pay date.
Employers who repeatedly miss deadlines may face monthly penalties. These are usually fixed amounts based on the size of your workforce:
- 1–9 employees: £100 per month
- 10–49 employees: £200 per month
- 50–249 employees: £300 per month
- 250+ employees: £400 per month
In addition, if a return is more than three months late, HMRC can charge an extra penalty of 5% of the tax and NIC due for that period. This comes on top of the fixed monthly charges.
Penalty Calculation Methods
The amount you pay depends on both the timing and frequency of late submissions. HMRC calculates penalties monthly, but they may not issue a notice immediately. Instead, penalties can accumulate and be notified later in the year.
If you make multiple late submissions within the same month, only one penalty is charged for that month. However, the penalty increases with the size of your payroll.
A further calculation applies when submissions are more than three months overdue. In this case, HMRC adds a percentage-based penalty on the unpaid PAYE and NIC for the relevant month. This ensures penalties reflect both the scale of the delay and the liability owed.
Appealing an RTI Penalty
You can appeal a penalty if you believe it was issued incorrectly or if you had a valid reason for filing late. HMRC refers to this as a “reasonable excuse”.
Acceptable reasons may include technical system failures, serious illness, or unexpected postal delays. However, forgetting a deadline or being short-staffed is rarely accepted.
Appeals must be submitted within 30 days of the penalty notice. You can use HMRC’s online PAYE portal or send a written appeal. Always provide supporting evidence, such as medical records, IT error logs, or correspondence with HMRC, to strengthen your case.
Closing a Limited Company with Debts?
Anderson Brookes Insolvency Practitioners help directors close limited companies with debt quickly, legally and with expert guidance every step of the way.
Contact us today
Interest on Late PAYE and NIC Payments
When PAYE or NIC is paid after the due date, HMRC applies daily interest until the balance is cleared. The rate is linked to the Bank of England base rate, and charges apply regardless of the size of your business or the reason for the delay.
How Interest Is Calculated
Interest begins the day after the payment deadline and runs until the full amount is settled. HMRC calculates it on a daily basis, which means even short delays can create additional costs.
The calculation uses the formula:
Outstanding amount × interest rate ÷ 365 × number of days late.
For example, if you owe £10,000 and the interest rate is 7%, being 10 days late would cost:
£10,000 × 0.07 ÷ 365 × 10 = £19.18.
This charge applies separately to each late payment, so multiple delays increase the total significantly. Interest is added automatically to your account, and you will see it on your HMRC online statement.
Interest Rates and Timeframes
The rate applied is HMRC’s late payment interest rate, which is set at the Bank of England base rate plus 2.5%. This ensures the rate moves in line with wider economic conditions.
Interest accrues from the statutory due date, not from when HMRC issues a demand. For PAYE and NIC, this is usually the 22nd of the month if paying electronically, or the 19th if paying by post.
There is no grace period beyond these dates. Even if you submit your Full Payment Submission (FPS) on time, paying late will still trigger interest. Unlike penalties, there is no allowance for a “first late payment” when it comes to interest charges.
Impact on Employer Finances
Interest charges may appear small at first, but repeated late payments can create a steady drain on cash flow. For businesses already managing tight margins, this can make budgeting more difficult over time.
You cannot claim late payment interest as a deductible business expense for Corporation Tax purposes. This means the cost comes directly out of your profits.
If you enter into a Time to Pay arrangement with HMRC, penalties may be suspended if you stick to the agreement, but interest will continue to accrue until the debt is cleared. This makes timely payments the most cost-effective approach.
Dealing with PAYE and NIC Arrears
When PAYE and NIC payments fall into arrears, HMRC will add interest and may apply penalties for persistent late payments. Addressing the arrears quickly, maintaining communication with HMRC, and arranging structured repayment options are the most effective ways to reduce further charges and avoid enforcement action.
Steps to Resolve Arrears
Start by confirming exactly how much you owe. You can check your PAYE account through HMRC’s online services, which will show outstanding liabilities, interest, and any penalties already applied. Accurate records help you avoid disputes and ensure you address the full debt.
Next, prioritise clearing the most urgent arrears. HMRC usually applies penalties on repeated late payments, so settling overdue PAYE and NIC before the next due date reduces the risk of escalating charges.
You should also review your payroll processes. Errors in Real Time Information (RTI) submissions often lead to discrepancies. Correcting these promptly ensures HMRC records match your actual payments and prevents unnecessary penalties.
If cash flow is a problem, prepare a realistic assessment of your finances. This will be essential if you need to negotiate with HMRC for more time or a structured repayment arrangement.
Negotiating with HMRC
HMRC expects you to make contact as soon as you recognise you cannot pay on time. Waiting until enforcement action begins will limit your options and increase costs.
When you call HMRC, be prepared with details of your arrears, current liabilities, and financial position. Clear evidence of your income and outgoings will strengthen your case.
You may be able to agree a temporary arrangement to delay payment or reduce immediate pressure. HMRC is more likely to accept proposals if you demonstrate that your business remains viable and you are taking steps to improve cash flow.
Always keep written records of any agreements. If you fail to meet the terms, HMRC can cancel the arrangement and pursue the debt through enforcement measures such as distraint or court action.
Setting Up Payment Plans
If you cannot clear arrears in one payment, HMRC may allow a Time to Pay (TTP) arrangement. This spreads the debt over affordable instalments, usually by Direct Debit.
Typical terms range from 6 to 12 months, though longer plans can sometimes be agreed if supported by financial evidence. Interest will continue to accrue, but late payment penalties are suspended as long as you keep to the plan.
To secure a TTP arrangement, you must show HMRC that the business can meet ongoing PAYE and NIC obligations while also paying off the arrears. Missing payments or falling behind on new liabilities will usually cause the plan to be withdrawn.
Maintaining accurate payroll records and making all future submissions on time is essential. HMRC monitors compliance closely, and consistent payment behaviour helps build trust and avoids further penalties.
Preventing Future RTI Penalties and Interest
You can reduce the risk of RTI penalties and late payment interest by tightening payroll routines, making full use of payroll software, and ensuring staff know the rules and deadlines. Attention to detail and consistent practices are key to avoiding unnecessary costs.
Improving Payroll Processes
You should start by reviewing how payroll data is collected and submitted. Errors often occur when information is incomplete or deadlines are overlooked. Setting up a clear timetable for each pay run helps you stay on track.
Keep accurate employee records, including start dates, leaving dates, and pay details. Missing or outdated information can cause incorrect submissions, which HMRC may treat as late or inaccurate.
Introduce internal checks before sending the Full Payment Submission (FPS). For example:
- Verify employee details (NI number, tax code, address)
- Check calculation accuracy for PAYE and NIC
- Confirm submission timing against HMRC deadlines
By building these checks into your routine, you reduce the chance of missed or incorrect filings.
Using Payroll Software Effectively
Payroll software can automate much of the RTI process, but it only works well if you configure it properly. Ensure your software is set to submit FPS and EPS reports directly to HMRC on or before the payment date.
Update the software regularly so it reflects the latest HMRC rules and thresholds. Outdated versions may miscalculate deductions or fail to meet reporting requirements.
Use built-in alerts and reports. Many systems allow you to:
- Set reminders for submission deadlines
- Generate audit trails for compliance checks
- Identify discrepancies before HMRC does
If you run multiple payrolls, consider consolidating them within the same system. This reduces duplication and lowers the risk of inconsistent data being sent.
Staff Training and Awareness
Even with strong processes and reliable software, staff need to understand their responsibilities. Provide training on HMRC deadlines, the importance of timely FPS submissions, and how late payments trigger penalties and interest.
Encourage staff to follow a checklist before each submission. A simple step such as confirming payment dates against the payroll calendar can prevent errors.
Make sure more than one person knows how to operate the payroll system. This avoids delays if the main payroll administrator is absent. Documenting procedures and keeping them accessible helps staff act quickly and correctly when issues arise.
Record Keeping and Documentation
Accurate payroll records support compliance with PAYE and NIC rules, reduce the risk of penalties, and provide evidence if HMRC questions your submissions. Clear documentation also helps you manage arrears, calculate liabilities correctly, and respond effectively to any disputes.
Required Payroll Records
You must keep detailed payroll information for every employee. This includes gross pay, deductions for tax and NIC, student loan repayments, pension contributions, and statutory payments such as sick pay or maternity pay.
You also need to retain copies of Full Payment Submissions (FPS) and Employer Payment Summaries (EPS) sent under RTI. These records show what you reported to HMRC and when, which is critical if you need to appeal a penalty.
Other essential documents include employee contracts, P45s, P60s, and any adjustments made to pay. You should also track payment dates and amounts to confirm that PAYE and NIC were remitted on time. Without this evidence, it becomes difficult to demonstrate compliance or challenge late payment interest.
A simple table can help you organise records:
| Record Type | Example Documents | Purpose |
|---|---|---|
| Employee Pay Details | Payslips, contracts | Verify gross pay and deductions |
| HMRC Submissions | FPS, EPS copies | Evidence of RTI compliance |
| Year-End Records | P60, P11D | Annual reporting requirements |
| Payment Evidence | Bank statements, receipts | Confirm PAYE/NIC paid on time |
Retention Periods
HMRC requires you to keep PAYE records for at least 3 years after the end of the tax year they relate to. In practice, many employers keep them for 6 years to align with wider accounting and company law requirements.
You should store both digital and paper records in a way that ensures they are complete and accessible. If HMRC carries out a compliance check, they may request historical data to verify reporting accuracy.
Where payroll software is used, ensure backups are maintained. If you change providers, transfer all data securely to avoid gaps in your records. Missing or incomplete records may result in difficulties proving that submissions and payments were made correctly.
Best Practices for Compliance
Establish a structured process for recording and reviewing payroll data. Regularly reconcile your payroll records against HMRC submissions and payment confirmations to identify discrepancies early.
Use payroll software that automatically generates and stores FPS and EPS files. This reduces the risk of missing information and provides an audit trail. Ensure access controls are in place so only authorised staff can amend records.
Create a checklist to verify that each pay run includes correct deductions, accurate payment dates, and timely reporting. Keep supporting documents, such as correspondence with HMRC, in a central location for easy retrieval.
Finally, schedule periodic reviews of your record-keeping system. This helps you confirm that retention rules are met and that your records remain reliable if challenged by HMRC.
Sectors We Support
We support company directors in every sector, from construction firms and logistics companies to pubs, cafés, restaurants, hotels, retailers and manufacturers. Our advice is always clear, confidential and shaped by real experience in your industry. Whether you’re dealing with unpaid tax, supplier pressure or falling income, our team understands the challenges and will guide you through the best next steps.
Seeking Professional Advice
When you fall behind on PAYE or NIC payments, professional guidance can help you understand your obligations and options. Accountants, tax advisers, or insolvency practitioners can explain how penalties and interest are applied and what steps you can take to reduce further costs.
A professional can also review your payroll processes to identify why arrears occurred. This may involve checking whether Real Time Information (RTI) submissions were late, incomplete, or inaccurate. Addressing these issues early reduces the risk of repeated penalties.
Benefits of seeking advice include:
- Clear explanation of HMRC rules and penalty structures
- Support with negotiating time-to-pay arrangements
- Guidance on correcting payroll errors and improving compliance
- Independent assessment of your company’s financial position
You may also need advice if your arrears are significant and affecting cash flow. In such cases, an adviser can outline options ranging from short-term repayment plans to longer-term restructuring.
| Type of Adviser | Typical Support Provided |
|---|---|
| Accountant | Payroll reviews, compliance checks, repayment planning |
| Tax Adviser | Penalty appeals, RTI reporting guidance, HMRC liaison |
| Insolvency Practitioner | Debt solutions, restructuring advice, formal recovery options |
Taking early professional advice helps you manage arrears in a structured way. It ensures you deal with HMRC correctly while keeping your business operations compliant and sustainable.
Frequently Asked Questions
You may face both interest charges and penalties if PAYE or National Insurance contributions are not reported or paid on time. HMRC sets clear rules for calculating interest, applying penalties under Real Time Information (RTI), and handling appeals.
How can I calculate interest on late PAYE payments?
You calculate interest from the day after the payment deadline until the date the amount is paid in full. HMRC applies a daily interest rate, which is based on the Bank of England base rate plus a set percentage. You can use HMRC’s online calculator or apply the published rate to the outstanding balance.
What are the penalties for submitting PAYE information late under Real Time Information (RTI)?
Penalties depend on the number of employees you have and how often returns are late. Monthly penalties typically range from £100 to £400, depending on payroll size. Repeated late submissions can increase the risk of further penalties.
Is there a deadline extension for PAYE payments due to exceptional circumstances?
HMRC may allow extra time if you can show a reasonable excuse, such as a serious IT failure or unexpected illness. You must contact HMRC as soon as possible and provide evidence. Extensions are not automatic and are granted only in limited situations.
How do I appeal against a PAYE or NIC penalty issued by HMRC?
You can appeal online through HMRC’s PAYE for Employers service or by post. You need to explain why you believe the penalty should not apply and provide supporting information. HMRC reviews appeals on a case-by-case basis.
What is the current interest rate for late National Insurance Contributions?
The rate is the same as for late PAYE payments. HMRC sets it at the Bank of England base rate plus 2.5%. This rate applies daily until the debt is cleared.
How can I pay outstanding PAYE and NIC amounts online?
You can pay using HMRC’s online services by debit card, corporate credit card, Direct Debit, or bank transfer. Faster Payments, CHAPS, and Bacs are all accepted. Always use your 13-character Accounts Office reference to make sure the payment is allocated correctly.