Avoid Late Tax Penalties With This Little-Known Trick
Author: Russell SmithJune 12, 2014
Worried about missing your PAYE deadlines? Listen to this sound tax advice from our chartered accountants in Leeds.
Tax systems for the self-employed are notoriously complicated and it’s common for busy business owners to occasionally forget to make payments. Heck, even Labour leader Jeremy Corbyn fluffed up his tax obligations and ended up paying out as a result.
Missing tax deadlines can be a nerve-racking experience, but a late payment is not necessarily going to result in a fine or other penalties. Our chartered accountants are experts in the world of self-assessment tax returns and PAYE, and we know exactly how to help you avoid tax penalties.
If you’re worried about late tax payments, keep reading.
Important note: The method we are about to discuss relates specifically to PAYE, but it can also be applied to any other tax obligations you may have that require payment on a regular basis, such as NI or CIS.
Understanding PAYE Payments
Avoiding penalties for late PAYE payments is actually quite easy. At Russell Smith Chartered Accountants, we can help you understand a simple method that helps you avoid late tax penalties.
But we’ll get to that in a minute.
First, we need to understand PAYE and why you might be paying it late. For those unfamiliar with the term, PAYE stands for Pay As You Earn, which essentially means tax paid to the government on a regular basis. This will happen whenever a pay packet is given out — not annually like self-assessment returns.
Meeting PAYE payments is the responsibility of an employer — a title which encompasses many of our clients, perhaps you as well.
Small business owners who have a roster of employees must register for and meet PAYE obligations. Every month, when you hand out wages, you must submit income tax and NI payments from your employees to HMRC.
For new business owners, or even long-term business owners who have only recently taken on employees, keeping up with PAYE can be tricky. You have to deal with a whole host of other tasks, from managing the business accounts to running your company, meaning admin responsibilities like tax payments can sometimes be forgotten. Even the most experienced business owners can slip up every now and then.
Tax penalties for late PAYE payments, however, can be severe.
If you miss two payments, you will be fined 1% of the total. If you miss four payments, the penalty is 2%, 6 is then 3% and so on.
If these payments go unpaid for 6 months, this fine will be increased by 5%, then up to 10% if you go one full year with payment. However, if you miss one payment there is no penalty, no charge.
This is how we preserve your small business accounts and avoid late payment charges.
How to Avoid Late PAYE Penalties
Here’s the tax advice from our team up in Leeds: Don’t pay up.
If you get caught up in late payments, you’ll end up in a nasty cycle. If you miss June’s payment, for example, and you pay late that month. In this circumstance, your accounts will fall behind and you’ll be more likely to pay late again in July, creating a never-ending cycle of late payments.
You’ll be trapped.
To avoid getting caught in this cycle, you should leave this late June payment outstanding. Then, when July rolls around, be sure to pay on time while still leaving June unpaid.
This way, instead of continuing to be behind payment every month, you will only miss one payment. By taking advantage of the one late payment that can go by without penalty, you will remain charge free.
To ensure HMRC allocates your PAYE payments to the correct month — July instead of June — you must send your payment using the corresponding reference. If you don’t, HMRC will allocate the money to your earliest outstanding payment, spoiling your plan!
Now you have broken the cycle and remain penalty free, take whatever were able to pay for the June deadline before it went by and save it — let’s say you had 60% of the funds required, keep the locked up. Every month for the next five months, set a small amount aside that allows you to catch up with the June payment. Then, before the 6-month deadline — November if missed in June — pay your outstanding PAYE.
Now you have no tax penalties, no outstanding late payments and your small business accounts remain intact.