Getting things wrong
Penalties are fines issued by HM Revenue & Customs (HMRC) where a person has not done something they should have. They are generally charged for either not doing something at the correct time, or not doing something accurately.
We talk about what to expect if you get your personal assistant’s (PA) tax status wrong in our tax employment status section. Here we look at what might happen if you operate Pay As You Earn (PAYE) incorrectly.
Sending in your employee information late (or not at all)
Paying your PAYE tax and National Insurance (NIC) late
Generic notification messages
Sending incorrect employee information
How will HMRC find out that my information is incorrect?
Correcting payroll errors
Keeping good records
Recovery of underpaid tax
Under Real Time Information (RTI) most employers must submit information electronically to HMRC each time they make a payment to an employee. There used to be a relaxation for very small employers (i.e. those with nine or fewer employers) who paid their employees more frequently than once per month (say, weekly, or fortnightly) so that submissions were only required once a month, but from 6 April 2016, this no longer exists.
For paper filers exempt from online filing, a return must be made once a quarter.
If you do not send in your payroll information on time (or at all) the position regarding penalties is as follows:
Penalties potentially apply to all employers for late filing of PAYE submissions. HMRC will usually informally allow a three-day grace period meaning that HMRC may not charge a late filing penalty for delays of up to three days after the statutory filing date. However employers who persistently file after the statutory filing date but within three days, will be monitored and may be contacted or considered for a penalty.
In all cases, the first late submission of the tax year is ignored. However second and subsequent failures may attract a penalty – the details of how the penalty will be calculated are on GOV.UK, but broadly the penalty will be determined by the number of employees. The minimum penalty is £100 (applied per month, but charged quarterly). An additional tax-geared penalty may be applied if a return is outstanding for three months or more.
Brand new employers can send their first submission within 30 days of first paying an employee without incurring any penalties. This late filing is also ignored for the purposes of determining the first tax month in which a return is filed late.
Even if you qualify for one of these concessions, you may still receive a generic notification message advising you of a default – you won’t get charged a penalty but this is HMRC’s way of trying to educate you.
In addition, if you do not submit your payroll information on time, HMRC can make an estimation of what you owe based on your previous PAYE submission history. You can find out more about this on GOV.UK.
Please note that where one of the concessions does not apply, late filing penalties will still not be charged if the taxpayer has a reasonable excuses. HMRC have suggested that they will accept reasonable excuses from taxpayers who are generally compliant without further investigation. This is so that they can concentrate their efforts on the more serious defaulters on a risk-assessed basis.
Strictly, there is no difference in treatment for late filing whether you are operating online RTI or paper process RTI. However, HMRC have indicated that they will take a sympathetic view and try and help educate 'paper' care and support employers who look like they may be struggling, as opposed to turning to penalties.
Saying that, if you have any difficulties with completing the forms we recommend calling HMRC to ask for help before you submit them. It is always better to contact them first rather than waiting for them to contact you.
You may find it useful to know that care and support employers are not necessarily distinguishable from other employers on HMRC’s systems. HMRC are trying to identify who care and support employers are, so that a signal can be set on your records. You do not have to agree to any signal being put on your employer records, but we believe it may be helpful to you if you need extra help and support to deal with your payroll, or if penalties become a factor. This will allow HMRC to identify you quickly and deal with you appropriately.
You should note that late filing penalties can be levied even if the associated payment of PAYE tax/NIC has reached HMRC on time.
Benefits and expenses
Penalties are also charged for late filing of forms P11D. For each form, there is an initial penalty of up to £300 plus £60 a day if the failure continues.
You will get a penalty of £100 per 50 employees for each month or part month a P11D(b) is late.
Interest and penalties may be levied where a person is late in making payments of PAYE tax and Class 1/1A/1B NIC in the tax year. You should note that late payment interest and penalties can be levied even if the associated payroll information has reached HMRC on time.
The amount of the penalty will depend on the number of late payments (known as ‘defaults’) in the tax year and can range from 1% to 4%. The first late payment does not count as a default.
In addition, if any amount of tax/NIC is more than six months late, a further penalty of 5% of the amounts outstanding will be levied and another 5%, if the tax/NIC is still outstanding after 12 months. These penalties apply to the first late payment of tax even though the first late payment does not count as a default.
You can find more information about this on GOV.UK. If you are a paper filer, you can find information on what happens if you don’t pay PAYE and NIC on time on page 41 of booklet RT7 – Guidance for employers exempt from filing Real Time Information online.
You can also read more about what to do if you make a late payment in our news piece ‘Missed the PAYE payment deadline – don’t panic’.
Please note that it is our understanding that HMRC allow a ‘tolerance’ of £100 for PAYE in-year late payment penalties (that is, they will not issue a penalty if the amount underpaid is £100 or less).
Penalties will also not be charged if the taxpayer has a 'reasonable excuse' for the late payment.
However interest may be applied to late payments, even if no penalties are levied. The current official interest rate is 3.25% per annum. You can find out more about interest on late payments of PAYE on GOV.UK.
Online filers may get a GNS if they don't send their payroll submissions on time (or at all), or they are late making payments, or full payments to HMRC. These messages are intended to help employers get things right and avoid incurring penalties.
Some of the notifications you may see are as follows:
A non-filing notice
Every PAYE scheme will have a filing expectation based on the frequency of previous submissions.
As such, this GNS will be sent to an employer who appears not to have sent one or more of the Full Payment Submissions (FPS) that HMRC expected for a particular period. It will explain that the employer is running the risk of incurring penalties – and what to do to avoid them.
These GNS messages will be issued on or around the 12th calendar day of the following tax month (around the 18th/19th). This is to allow an employer to file an Employer Payment Summary (EPS) by the 19th of the following month, where no payments were actually made to an employee, which will then cancel the ‘failure’ in the system.
A late filing notice
In a similar vein, this will be sent to an employer who appears to have submitted an FPS late. HMRC will compare the date of the submission of the FPS with the date of payments to individuals within it.
If an individual's payment date within an FPS is earlier than the submission date, the GNS message will be triggered.
An employer will receive a maximum of one late file GNS message in a tax month irrespective of the number of times they submit late RTI returns during that period.
A late payment notice
HMRC carries out payment checks after each monthly (or quarterly) payment deadline is passed.
This GNS will be sent out by HMRC if an employer has not made their PAYE payments (as shown as due from their records) in full by their due date. It will explain that in order to avoid potential penalties in future, employers should bring payments up-to-date and ensure future payments are made on time and in full.
It will also explain what to do if no payments were actually due.
Most users of commercial payroll software who make their submissions over the internet will receive the notifications through their software automatically. If the payroll software is not compatible or HMRC’s Basic PAYE Tools are used, the notifications will be available by logging on to HMRC's PAYE for Employers online service and selecting the notification from within the ‘Notice summary’ section.
You can find out more about GNS and what to do if you get one on GOV.UK.
Where HMRC discovers careless or deliberate errors in pay and tax information submissions, including P11D(b) forms, the penalties that could apply will be based on the behaviour that led to the error and the amount of potential tax lost because of the inaccuracy.
Of course, an incorrect submission may just be a mistake you have made innocently when you run your payroll. These things can happen and HMRC recognise that. As such, errors that arise, despite taking reasonable care, attract no penalty at all and penalties for errors due to failure to take reasonable care can be reduced to zero with full and unprompted disclosure to HMRC. For information about disclosure see HMRC’s guidance.
It is important to understand that errors that lead to no lost tax cannot, by definition, attract a penalty.
If a penalty is charged because a taxpayer failed to take reasonable care, the penalty may be suspended by HMRC for up to 2 years. If the conditions set by HMRC are met by the taxpayer at the end of the suspension period, the penalty will be cancelled.
Benefits and expenses
Incorrect forms P11D are not dealt with by these rules. If an incorrect form P11D is filed fraudulently or negligently, a penalty of up to £3,000 can be levied in respect of each form. However this will only be seen in the most serious cases.
It is important that employers who have made a mistake in running their payroll, try and correct it themselves as soon as possible, not least because this will help ensure that employees who receive universal credit, will get the correct amount of benefit.
From time to time HMRC undertake PAYE audits (Employer Compliance Reviews) to make sure that employers are operating PAYE correctly. You can be randomly chosen for a PAYE inspection or you could be specifically selected if you do things like file payroll submissions late, pay tax late or make errors that need correcting.
The first step is a letter or phone call from HMRC announcing its intention to visit and inspect your records.
They will probably want to concentrate on common problematic areas such as correct use of employee tax codes, correct treatment of new employees and leavers, expense payments, employee benefits and their correct disclosure on forms P11D and employment status.
You can read more about what to expect in a PAYE audit in our section on getting employment status wrong.
In general, you should try and assist the HMRC officers as much as possible. This will typically make their visit a shorter, more pleasant experience for all parties and if the worst happens and some error is discovered, minimise the penalty level. In a similar vein, if your preparation has highlighted any problems or mistakes, let the officers know. They will be more sympathetic if you come clean, and you are far less likely to have to pay any penalties.
If it looks like a penalty may be in point but you have made a genuine mistake and are willing to meet conditions aimed at avoiding further inaccuracies in future, HMRC can suspend the penalty as discussed above. Find out more about this in HMRC’s factsheet.
In an ideal world, you would not need to correct errors, but occasionally even the most diligent employers will forget to process something or deal with something incorrectly. Whatever the reason, and even if you will get a penalty anyway, you must try and correct the mistake so that HMRC have payroll information and figures that are accurate.
Online filers can find some guidance on what to do on GOV.UK. Below we outline what to do in a few common scenarios:
- If you have made a small mistake with your employee’s personal details, e.g. spelling mistake in name, you should correct it in your next FPS.
- If an employee’s name or address changes, they must contact HMRC to report this – as well as you updating it in your payroll software.
- If you put the wrong start date for an employee in your FPS, update your payroll records with the correct date. Do not report the amendment in your next FPS as this may create a duplicate record for the employee.
- If you have sent an FPS with the wrong payment date in, send an additional FPS with the correct payment date – write ‘H – correction to earlier submission’ in the ‘Late reporting reason’ field.
- If a payroll reporting error has been made in respect of the current year and it is discovered before the next FPS is submitted, the error can be corrected by using revised year to date figures on the next FPS. Alternatively, the adjustment can be shown by submitting an additional FPS for the same pay period.
- If the error is discovered in the current tax year but after a later FPS has been submitted, adjusted year to date figures must be reported on the next FPS. An additional FPS must also be submitted if an additional payment to an employee is required.
- Where the error relates to the previous tax year but it is discovered on or before 19 April in the current tax year, an additional FPS with the correct figures can be submitted. So, if an error relating to 2018/19 is discovered on 10th April 2019, it can be corrected by way of an additional FPS.
- If the prior year error is discovered after 19th April, the error can be corrected by submitting an Earlier Year Update (EYU).
- If an error has been made in an EPS in the current tax year, another EPS should be submitted to show the correct year to date figures. If the EPS relates to a previous tax year, an EPS should be submitted to show the correct total figures for that year.
Users of HMRC’s Basic PAYE Tools (BPT) should check the user guide which contains step-by-step help on the most common functions of BPT, including how to amend or correct details of an employee payment and how to add a mis-timed employee payment.
If you are paper filing, guidance on what to do to correct payroll errors can be found on page 36 in booklet RT7 – Guidance for employers exempt from filing Real Time Information online.
Benefits and expenses
Put all the benefits and expenses for the tax year on the form, not just the ones you want to correct.
You must submit a paper form, even if you originally submitted online.
For more on correcting errors on benefits and expenses, see GOV.UK.
There are also penalties that HMRC can charge if you fail to keep proper records. It is important that you are aware of this.
You can find out what happens if you do not keep proper records on GOV.UK.
Late filing penalties/late payment penalties
A reasonable excuse is normally something unexpected or outside your control that stopped you meeting a tax obligation. The following list shows some examples of possible ‘reasonable excuses’, however HMRC will decide based on the individual circumstances whether they accept the excuse in your case.
- your partner or another close relative died shortly before the tax return or payment deadline
- you had an unexpected stay in hospital that prevented you from dealing with your tax affairs
- you had a serious or life-threatening illness
- your computer or software failed just before or while you were preparing your online return
- service issues with HMRC's online services
- a fire, flood or theft prevented you from completing your tax return
- postal delays that you couldn’t have predicted
If you have a disability and claim to have a reasonable excuse that prevented you from meeting a deadline, HMRC will consider whether you made a reasonable effort to meet your obligation on time.
You can also appeal against HMRC's decision not to accept your reasonable excuse if you still think you have a reasonable excuse.
Online filers are able to appeal online against a filing or payment penalty, using HMRC’s Basic PAYE Tools payroll program and/or HMRC’s PAYE for Employers online service. We give an example of how to do this in our news piece. HMRC have suggested that they will accept reasonable excuses from late filing or late paying taxpayers who are generally compliant without further investigation.
You can also send a late filing appeal in writing to:
National Insurance Contributions and Employers Office
HM Revenue and Customs
You should send a written appeal against a late payment penalty to:
DM PAYE Late Payment Penalties
HM Revenue and Customs
If you do not agree that there has been an inaccuracy, you should tell the HMRC officer you have been dealing with so they can consider the position.
See HMRC's factsheet on penalties for inaccuracies in returns and documents for more information.
Where an employer fails to operate PAYE correctly and this results in an underpayment of tax, HMRC can either recover the tax from the employer or from the employee. In the first instance, HMRC should usually attempt to recover the tax from the employer before trying to contact the employee.
As such, having quantified the tax underpaid, HMRC should issue a notice to the employer under Regulation 80 of the PAYE Regulations. The employer has a right to appeal this determination if they think it is incorrect but if no appeal is lodged, the determination becomes final and conclusive within 30 days.
If HMRC are satisfied that the employer took reasonable care to comply with the PAYE Regulations and any underpayment of tax arose due to an error made in good faith, HMRC will instead seek recovery of the tax from the employee.
HMRC will also seek collection of the tax from the employee if they have reason to believe that the employee accepted their earnings in the full knowledge that the employer had under deducted tax.
Although it is aimed at employees and quite old, you might find HMRC’s guidance on what counts as an employer error useful.