If you cannot pay your tax bill in full, a Time to Pay arrangement allows you to spread your tax bill into manageable monthly instalments. While interest still applies, you can avoid further late payment penalties once HMRC agrees to the plan and you keep to it.
What is a Time to Pay Arrangement?
A Time to Pay arrangement is a formal agreement with HMRC. It allows you to pay tax debts over an agreed period rather than in one lump sum.
You can request a Time to Pay arrangement for:
- Self Assessment
- Corporation Tax
- VAT
- PAYE and National Insurance
- CIS liabilities
Most arrangements run between six and twelve months. However, HMRC may agree to a longer period where circumstances justify it. You will normally pay by monthly Direct Debit.
HMRC charges interest on the outstanding balance. The current late payment interest rate stands at 7.75%. Nevertheless, once HMRC approves your arrangement, they will not add new late payment penalties, provided you maintain the plan.
If you contact HMRC before matters escalate, you demonstrate responsibility and a genuine intention to resolve the issue.
Who Can Apply Online?
If you owe Income Tax (through Self Assessment), you may qualify to set up a payment plan online. HMRC provides a digital service for straightforward cases.
You must meet all the following conditions:
- You have submitted your latest tax return
- You owe £30,000 or less
- You have no other outstanding tax debts
- You have no other HMRC payment plans in place
- You apply within 60 days of the payment deadline
If you satisfy these criteria, you can log into your Government Gateway account and select the option to set up a payment plan. In many cases, approval happens immediately without the need for a phone call.
If you do not meet these conditions, you must contact HMRC directly to discuss your circumstance.
Contacting HMRC Directly
You must contact HMRC by phone if:
- You owe more than £30,000
- You need longer than 12 months to pay
- You owe other types of tax
- You already have an existing payment plan
During the discussion, HMRC will review your financial position in detail. You should prepare information about:
- The amount you owe
- How much you can pay upfront
- Your monthly income
- You essential living costs
- Any savings or assets
- When you expect your cash flow to improve
Time to Pay for Limited Companies
Companies can also request Time to Pay arrangements. This often applies to:
- Corporation Tax
- VAT
- PAYE liabilities
Before agreeing to a plan, HMRC may request detailed financial information. They may also expect directors to explore all available funding options.
HMRC could ask directors to:
- Inject personal funds into the business
- Seek external lending
- Release company assets such as stock or vehicles
HMRC wants reassurance that the company can meet future tax obligations. Therefore, directors must present a credible and sustainable proposal.
How HMRC Calculates Your Monthly Payments
HMRC bases your repayment plan on affordability. They review your income and deduct essential expenditure.
These costs usually include:
- Rent or mortgage payments
- Food
- Utilities
- Fixed commitments
After this assessment, HMRC calculates your disposable income. In most cases, they expect you to pay around 50% of that disposable amount towards your tax debt.
However, flexibility does exist. If your finances improve, you can increase your payments and reduce the charged interest. Equally, if your situation worsens, you should contact HMRC promptly to review the plan.
If you receive a pension, HMRC treats it as income. However, they do not count the value of your pension pot as available savings.
How a Time to Pay Arrangement Works
Consider you have a Self Assessment debt of £1,500. You agree to pay £250 per month for six months. Interest accrues daily on the remaining balance. Each payment reduce the outstanding amount.
Consequently, HMRC calculates future interest on the lower balance. At an interest rate of 7.75%, you may pay approximately £33 in interest over six months. Therefore, your total repayment would equal around £1,533.
Missing a Payment
If you miss a payment, you should contact HMRC immediately. In most situations, HMRC will attempt to rearrange the agreement. However, if you ignore the missed payment, HMRC may cancel the arrangement. They can then restart penalties and begin enforcement action.
HMRC has several recovery options. They can:
- Use debt collection agencies
- Take money directly from wages or pensions
- Remove funds directly from bank accounts
- Apply to court for recovery action
- Close a company for unpaid business taxes
HMRC may also add recovery costs to your debt.
A Budget Payment Plan
A Budget Payment Plan differs from Time to Pay. You use it before your tax becomes overdue. This allows you to make regular weekly or monthly payments towards your next Self Assessment bill. As a result, you reduce the risk of facing a large lump sum in January.
To qualify, you must:
- Have submitted all tax returns
- Have no outstanding debts with HMRC
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This article is for general informational purposes only and does not constitute legal or financial advice. While we aim to keep our content up to date and accurate, UK tax laws and regulations are subject to change. Please speak to an accountant or tax professional for advice tailored to your individual circumstances. Pi Accountancy accepts no responsibility for any issues arising from reliance on the information provided.