Employer deductions: late payment penalty

The cost imposed by HMRC on employers for late payment of amounts deducted under PAYE, NIC, student loan repayments and the employer’s liability to secondary NIC changed from 6 April 2014.

Now the penalty is an interest charge calculated by reference to each remittance. If an employer pays early HMRC will pay interest. The rates are the standard HMRC rates, currently 3% pa for late payment and 0.5% pa for early payment. These charges to interest calculated on a daily basis by reference to each late or early payment replace the previous crude system which imposed a flat rate charge of between 1% and 4% of the total of all the late paid remittances of the tax year as a whole regardless of whether the individual payments were one day or six months late. 

The new regime will be much less severe in almost all cases, particularly on employers who are a few days late in making payment. To illustrate, suppose the employer’s monthly remittances were all £100,000 and this employer’s remittance was 5 days late on 5 occasions during the tax year. Under the old regime (applying up 2010/11 to 2013/14 inclusive) after the end of the tax year the employer would suffer a penalty of £10,000 (2% on the aggregate late remittances). Under the new regime applying from 2014/15 onwards the aggregate charges this employer will suffer will be £205 (interest at 3% pa for the actual period each individual payment was late). HMRC will demand payment of the late payment interest after each month in which payment is late rather than after the end of the tax year. This is a considerable improvement on the old system where defaulting employers might have been unaware of the magnitude of the penalty until well after the end of the tax year.

HMRC have issued a two page guidance note on the new provisions.

Neither the old style penalty nor new style interest charge is allowable in computing the employer’s profits for income tax or corporation tax.