Outstanding Tax Payment: How to Deal With HMRC Before It Escalates

What Does Outstanding Tax Mean?

Tax becomes outstanding when the amount due has not been paid by the statutory deadline. The debt may consist of:

• The original tax liability
• Payments on account
• Late-payment interest
• Late-payment penalties
• Late-filing penalties
• Enforcement or court costs

An overdue amount does not disappear because HMRC has not contacted you recently. Interest can continue while the debt remains unpaid, and HMRC may later pursue the accumulated balance.

Why You Should Act Quickly

Early action can materially improve the options available. HMRC’s published approach is to work with taxpayers who genuinely cannot pay, but it expects prompt engagement and a realistic plan.

Acting early can help you:

• Correct an inaccurate bill before enforcement begins
• File missing returns and establish the actual liability
• Apply for Time to Pay before the debt escalates
• Reduce the balance by making an immediate part-payment
• Avoid unnecessary collection costs
• Protect against some late-payment penalties where the rules are met

Waiting does not usually improve the position. It can reduce HMRC’s confidence that future instalments will be maintained.

First Confirm That HMRC’s Balance Is Correct

Before agreeing to repay an outstanding tax payment, check whether the amount is accurate. HMRC records can include estimated assessments, unallocated payments, duplicated charges or penalties arising because a return was not submitted.

Review:

• The tax type and accounting or tax period
• The original payment deadline
• The return or calculation that created the liability
• Payments already made
• PAYE or other tax deducted at source
• Losses, allowances and reliefs claimed
• Payments on account
• Any HMRC amendment or estimated assessment
• Interest and penalty calculations

What If a Payment Has Not Been Allocated?

Check the payment reference and bank evidence. A payment can be allocated to the wrong tax, period or taxpayer where an incorrect reference was used. Contact HMRC with the date, amount, bank reference and intended liability. Correcting a misallocated payment can sometimes reveal a genuine overpayment rather than a debt, in which case recovering that money follows a separate refund process.

What If the Tax Return Is Wrong?

An open Self Assessment return may be amended within the relevant time limit. Other corrections may require a separate claim, disclosure or appeal. A payment plan should not be used as a substitute for correcting an invalid liability.

Outstanding Tax Returns and Outstanding Tax Bills

Outstanding tax returns and unpaid tax are separate compliance problems. If a required return has not been filed, HMRC may not know the final amount due and can issue estimated assessments or filing penalties.

Submit overdue returns as soon as possible, even if you cannot pay the resulting bill. Filing can:

• Replace an estimated assessment with the correct figure
• Stop some daily filing penalties from increasing
• Allow HMRC to assess a Time to Pay request
• Show that you are engaging with the problem

Late-filing penalties normally remain separate from any payment arrangement.

Can HMRC Let You Pay an Outstanding Tax Bill in Instalments?

Spreading tax payments by using Time to Pay may be possible where the debt is valid, the taxpayer cannot pay in full and the proposed instalments are affordable. The agreement normally uses monthly Direct Debit payments.

A plan may record:

• The debts and periods included
• Any immediate payment
• The monthly instalment amount
• The collection dates
• The expected final payment
• The requirement to keep new taxes up to date

Approval is not automatic. HMRC may require full payment where it believes sufficient funds or assets are available, the proposal is too low or the taxpayer will not be able to meet future obligations.

Setting Up an HMRC Payment Plan Online

HMRC provides a single online service that checks whether a taxpayer is eligible to create a payment plan. The service applies different tests according to the tax debt and the taxpayer’s circumstances.

You normally need:

• The relevant tax reference
• A filed return or submission where required
• The debt to appear on the HMRC account
• UK bank details
• Authority to create a Direct Debit
• Income and expenditure information

Online Self Assessment Plans

HMRC continues to promote the option to set up a Self Assessment payment plan with HMRC online for eligible debts of up to £30,000. The relevant return must be filed first. If the debt is higher, a longer period is needed or the online service does not accept the application, contact HMRC directly.

PAYE, VAT and Simple Assessment

HMRC’s online service may also be available for some PAYE, VAT and Simple Assessment debts. Eligibility is checked live and can depend on the amount, the age of the debt, whether returns or submissions are outstanding, other HMRC liabilities and the proposed repayment period.

Do not rely on historic public thresholds without checking the live service. If you are not eligible online, a directly negotiated plan may still be possible.

How to Apply for Time to Pay

1. File all outstanding returns and submissions.
2. Confirm the total amount due.
3. Pay any amount you can afford immediately.
4. Sign in to HMRC’s online payment-plan service.
5. Complete the eligibility checks.
6. Enter the proposed monthly repayment.
7. Provide Direct Debit details.
8. Review and save the agreement.

If the service refuses the request or does not cover the relevant debt, use HMRC’s payment-problems contact route for the tax involved.

What HMRC Will Ask If You Apply Directly

HMRC will usually ask enough questions to determine whether the proposal is realistic and affordable.

Prepare:

• Monthly employment, trading, rental and pension income
• Essential household or business expenditure
• Current bank balances
• Savings and investments
• Property and other assets
• Existing loans and creditor commitments
• Money owed to you or your business
• The cause of the arrears
• The amount available immediately
• The highest sustainable monthly payment
• Future tax bills becoming due

HMRC states that taxpayers with savings or assets may be expected to use them to reduce the debt. Companies may also be asked to release value from stock, vehicles or shares.

How HMRC Assesses Affordability

HMRC considers disposable income after reasonable essential expenditure. It does not use one universal repayment formula.

Factors can include:

• Whether the difficulty is temporary or ongoing
• The reliability of income and cash flow
• Whether non-essential spending can be reduced
• Available savings, investments and assets
• The taxpayer’s previous payment history
• Whether future taxes can be paid on time
• The viability of a business

The plan must be affordable enough to maintain but should clear the debt as quickly as reasonably possible.

How Long Can a Payment Plan Last?

HMRC’s general guidance states that there is no single time limit applying to every payment plan. The duration depends on the amount owed and what the taxpayer can afford each month.

Some online services impose their own eligibility periods. Directly negotiated plans can be shorter or longer according to the evidence.

HMRC may seek a shorter period where:

• Cash or savings are available
• Assets can reasonably be sold
• Debtors are expected to pay soon
• Discretionary spending can be reduced
• A refund or other receipt is due

Interest on Outstanding Tax Debt

Late-payment interest normally begins from the original due date and continues until the liability is paid. An agreed instalment plan does not generally stop interest.

Since 6 April 2025, HMRC’s standard late-payment rate has been the Bank of England base rate plus four percentage points. The published rate was 7.75% from 9 January 2026, but the percentage can change when the base rate changes.

Illustrative Interest Example

If £12,000 remained unpaid for a full year at an unchanged illustrative rate of 7.75%, simple annual interest would be approximately £930. Actual interest will differ where instalments reduce the balance or the rate changes.

Penalties on an Outstanding Tax Bill

Penalty rules vary by tax and period. Interest and penalties are separate charges.

Existing Self Assessment Late-Payment Penalties

• 5% of unpaid tax at 30 days
• A further 5% of tax still unpaid at six months
• A further 5% of tax still unpaid at 12 months

A qualifying Time to Pay proposal made within the relevant period can prevent some penalties where the agreement is accepted and maintained.

Making Tax Digital Penalties From 2026/27

Some sole traders and landlords entering Making Tax Digital for Income Tax from 6 April 2026 move to the newer late-payment penalty regime for the tax year in which they join.

The newer system can include:

• 3% of tax outstanding at day 15
• A further 3% of tax outstanding at day 30
• An annual rate of 10%, calculated daily from day 31

A first-year 30-day easement may apply to taxpayers entering the system, but interest still runs from the payment deadline. Earlier tax years remain under the existing rules.

VAT and PAYE Penalties

VAT and PAYE have their own late-payment penalty regimes. Filing or submitting the required return on time remains important even where payment cannot be made.

Can You Make Part-Payments?

Yes. A part-payment reduces the amount on which future interest is calculated. However, occasional payments without an accepted arrangement do not automatically stop penalties or enforcement. A quick part-payment can usually be made online by paying tax by credit or debit card, which is often the fastest way to start reducing the balance while a longer-term plan is arranged.

Use the correct HMRC reference so the payment is allocated to the intended tax and period.

What If You Miss an Instalment?

Contact HMRC immediately. It may ask why the payment failed and whether the arrangement needs to be revised.

If you do not engage, HMRC may cancel the plan and resume debt recovery. Be ready to explain:

• Why the instalment was missed
• What can be paid now
• Whether the problem is temporary
• What revised amount is sustainable
• How future payments will be maintained

Can a New Tax Liability Be Added?

Contact HMRC if another tax bill becomes unaffordable. HMRC may review the existing arrangement and consider adding the new debt, but this is not automatic.

The instalment amount and repayment period may need to change. Repeatedly adding new liabilities can cause HMRC to question whether the arrangement is viable.

What Happens If Outstanding Tax Is Ignored?

If you do not contact HMRC or cannot agree instalments, HMRC may:

• Use a debt collection agency
• Collect money through wages or pension income
• Take control of goods and sell them in England, Wales or Northern Ireland
• Recover money directly from bank or building society accounts where legal conditions are met
• Take court action
• Begin bankruptcy proceedings
• Seek to wind up a company where the debt is a business liability

HMRC normally gives notice before taking these steps and explains the taxpayer’s rights, costs and options. Enforcement costs can be added to the debt.

HMRC Debt Collection Agencies

HMRC may refer an outstanding debt HMRC is pursuing to an approved collection agency. The agency can request payment and discuss the debt, but it cannot change the amount HMRC has referred.

Verify unexpected communications through official HMRC channels. Fraudsters often use threats of arrest, immediate court action or refunds to obtain bank details.

Direct Recovery From Bank Accounts

HMRC can recover some debts directly from bank and building society accounts in England, Wales and Northern Ireland where statutory conditions and safeguards are satisfied.

This power is generally used after attempts to contact the taxpayer. Do not assume money will remain untouched indefinitely if HMRC correspondence is ignored.

Deductions From Wages or Pensions

Some debts can be collected through a PAYE tax code, wages or monthly pension payments. This can reduce future take-home income.

Check any coding notice to understand the debt and collection period.

Taking Control of Goods

HMRC enforcement officers can take control of goods in England, Wales and Northern Ireland. Goods may ultimately be sold to clear tax, interest, penalties and enforcement fees.

Seek urgent professional advice if an enforcement officer attends or a formal notice is issued.

Court Action, Bankruptcy and Winding Up

Persistent or serious non-payment can lead to court proceedings, bankruptcy against an individual or winding-up action against a company.

These processes can affect assets, trading ability, credit access and professional duties. Specialist insolvency advice may be required where a taxpayer cannot meet debts as they fall due.

Outstanding Self Assessment Tax

A Self Assessment balance may include:

• A balancing payment
• The first payment on account
• The second payment on account
• Capital Gains Tax included in the return
• Interest and penalties

File the return, review the payments on account and check the online plan service. A personal arrangement does not automatically cover company debts.

Outstanding Corporation Tax

A company should contact HMRC promptly if Corporation Tax cannot be paid. HMRC may request management accounts, cash-flow forecasts, bank statements, debtor information and details of assets.

Directors should also consider whether the company is solvent and able to pay future debts. Time to Pay should not be used to postpone an unavoidable insolvency problem.

Outstanding VAT

Submit the VAT return on time even if payment is unavailable. VAT late-payment interest and penalties can apply separately.

HMRC may consider a plan, but repeated unpaid VAT can lead it to question whether the business can remain compliant.

Outstanding PAYE and CIS

Employers should bring all PAYE and Construction Industry Scheme submissions up to date before requesting a plan. These liabilities include money deducted from workers, so HMRC may examine the cause of the arrears carefully.

The employer should show how future payroll deductions will be paid while the old debt is reduced.

Time to Pay Versus Reducing Payments on Account

Time to Pay Versus a Budget Payment Plan

When HMRC May Refuse a Payment Plan

HMRC may refuse where:

• Returns or submissions remain outstanding
• Sufficient cash or assets are available
• The proposed instalment is too low
• The repayment period is unnecessarily long
• The plan ignores future liabilities
• The business is not viable
• Previous arrangements have repeatedly failed
• The information provided is incomplete or inconsistent

A revised proposal may be possible after filing returns, correcting figures or increasing the immediate or monthly payment.

When to Seek Debt or Insolvency Advice

Consider specialist advice where:

• You owe several creditors
• You are borrowing to pay normal tax liabilities
• The business cannot meet wages or suppliers
• HMRC has threatened bankruptcy or winding up
• Enforcement officers have attended
• You cannot fund future tax while paying old debt
• The proposed instalments are unaffordable

A tax adviser can verify the liability, while a regulated debt or insolvency professional may be needed for wider financial distress.

Common Mistakes With Outstanding Tax Debt

• Ignoring HMRC letters, calls or visits
• Leaving returns unfiled
• Assuming an online application is automatically accepted
• Offering an unaffordable instalment
• Believing interest stops under Time to Pay
• Failing to budget for future liabilities
• Making payments with the wrong reference
• Reducing payments on account without justification
• Missing a Direct Debit without contacting HMRC
• Waiting until court or insolvency action begins

Practical Checklist for an Outstanding Tax Payment

1. Open and review every HMRC letter.
2. File outstanding returns and submissions.
3. Download or request the current statement.
4. Check the tax, penalties and interest.
5. Identify any correction or appeal required.
6. Make an affordable part-payment.
7. Prepare income, spending and asset information.
8. Check the online payment-plan service.
9. Contact HMRC if online setup is unavailable.
10. Keep written confirmation of the final arrangement.

Many of these steps, including making a part-payment or checking the current balance, can be handled quickly through the HMRC app rather than requiring a full desktop session each time.

Final Guidance on Resolving Outstanding Tax Debt

An outstanding tax payment should be reviewed and addressed as soon as possible. Confirm the balance, file missing returns, make any affordable part-payment and contact HMRC with accurate income, expenditure and asset information.

An agreed plan does not normally stop interest, and an application should not be treated as accepted until HMRC confirms it. However, early engagement can make an outstanding tax bill easier to manage and reduce the risk of penalties, debt collection, court action or insolvency proceedings. Once resolved, reviewing what led to the arrears as part of your regular pre-tax year-end planning can help reduce the chance of the same problem recurring next year.

Outstanding Tax Payment Case Study

Michael, a property investor, visited our Wimbledon office after discovering he had an outstanding tax payment on his HMRC account following the submission of his Self Assessment return. He had intended to clear the balance before the deadline, but unexpected repair costs on several rental properties meant he could not pay the full amount on time. Concerned about increasing interest and possible HMRC enforcement, he wanted to understand his options before the situation escalated.

After reviewing his HMRC statement, we first confirmed that the outstanding balance was accurate and that all payments had been correctly allocated. We then discussed whether a Time to Pay arrangement would be appropriate based on his financial circumstances and helped him prepare the income, expenditure and cash-flow information that HMRC would expect before considering a repayment proposal. We also explained that making an immediate part-payment could reduce the amount on which late-payment interest would continue to accrue.

During the consultation, Michael realised that leaving HMRC letters unanswered could significantly reduce his available options. By addressing the issue early, he was able to take practical steps before debt collection or other recovery action became necessary.

By the end of the meeting, Michael had a clear strategy for resolving his outstanding tax debt, managing future liabilities and maintaining good compliance with HMRC.