What Happens If I Can’t Pay My Personal Tax Bill?

If you can’t pay your tax bill on time, the most important steps are to act early, understand the risks, and contact HMRC before the debt grows.

WHY IS MY TAX BILL UNEXPECTEDLY HIGH?

There are all sorts of reasons you might find yourself unable to pay your tax bill in full.

An increase in income that seemed like a fantastic bonus at the time could actually have unforeseen tax implications. If you’re earning additional cash via a side hustle, trading on sites such as eBay or Etsy, and your extra income exceeds £1,000 pa, you must register for Self Assessment and declare your earnings – even if you have a full-time job paid through PAYE. Side hustles can potentially tip you into a higher tax bracket or generate a larger tax liability than you expected.

If you’re self-employed and have enjoyed a particularly good second half of the year while your costs have remained same, your higher earnings will come with a higher tax bill. Even if you pay twice yearly on account, your payments might not cover the new amount.

Even when you know a tax bill is coming, rising living costs, reduced work or job loss, illness or unexpected family care commitments can sometimes leave too little cash available when payment for last year’s bill becomes due.

What happens if I miss HMRC’s payment deadline?

If you don’t pay your bill on time, interest (currently 7.75% pa) is applied immediately and calculated daily until the whole debt is settled. After 30 days the first late payment penalty of 5% is applied. Then there’s a further penalty when the debt is six months old, and another after a year. This means even a relatively small bill can quickly spiral out of control.

In the first instance, HMRC’s debt management team will try to contact you either by post, email or phone.  They’ll only do this for a few months and, if you ignore the reminders, they can eventually pass the debt to an enforcement agency. This means having debt collectors call at your home to take payment or seize goods to the value of the outstanding bill, plus their own additional charges.

What should I do if I can’t pay my tax bill

The best response is early action. First, work out exactly what you owe – check whether your debt includes interest and penalties as well as the original tax. Knowing the full figure helps avoid underestimating the problem.

If you can’t pay your tax bill, and we are your accountant, speak to us as soon as possible: we are here to help. Our advice will always be to contact HMRC but we can make sure you are properly prepared. Getting in touch with HMRC shows your commitment to paying, and often they’ll agree to spread the outstanding amount over monthly installments if you make an initial payment there and then over the phone.

Ideally you would prepare a household budget in advance and work out what can be paid each month. This helps make discussions more realistic and reduces the risk of agreeing to an amount you can’t sustain.

If you owe less than £3,000 and have a Government Gateway, you can set up a payment plan online.  Interest is still added in both cases, but it is re-calculated daily, so the interest reduces as the balance goes down.

Mistakes to avoid

1. Panicking. Panic leads to poor decisions; stay calm and think rationally.
2. Ignoring it. HMRC won’t go away. Doing nothing makes matters worse because interest and penalties increase the debt. The Government’s Money Helper and HMRC payment support options can help earlier than you may realise.
3. Borrowing badly. Using credit cards or high-interest loans to clear tax debt can create a longer-term problem.
4. Guesswork. Don’t estimate what you can afford. Review your finances honestly before speaking to HMRC.
5. Not completing a return. Even if you know you won’t be able to pay the full bill immediately, don’t put off filing your return on time – this leads to even more penalties.

Positive steps to prevent tax debt

As so many tax issues are caused by poor planning, our advice is to think ahead.

1. Set up a separate tax savings account and pay into it regularly.
2. Consider paying HMRC monthly towards your final bill – this way you can’t be tempted to dip into your pot for something else. If you’ve overpaid, you’ll get a refund at the end of the year.
3. If part of your income is PAYE and you file your tax return before 31 October, you can have the liability coded into your personal tax code for the next year – payments come straight out of your wages starting the following April.
4. An expert advisor, such as TC Group, can help reduce your bill legally. For example, we offer a 10-month planning review; a couple of months before the tax year ends, we look at your accounts and examine ways to maximise the tax reliefs approved by HMRC.
5. Paying someone to unpick a complicated tax debt can be more expensive than having an accountant help you avoid one in the first place. Plus, accountant fees are tax deductible!

Final thoughts

Not being able to pay your personal tax bill does not automatically mean the situation is hopeless, but silence and delay lead to worse outcomes. The best approach is to respond early, avoid panic decisions and take expert advice to put a realistic plan in place before the debt becomes harder to manage.

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FAQs

What should I do if I can’t afford to pay my personal tax bill?
Contact HMRC as soon as possible. Acting early can help prevent additional penalties and reduce the risk of enforcement action.

Can I arrange a payment plan with HMRC for unpaid tax?
Yes, HMRC offers payment plans if you’re struggling to pay in full, you can set one up either online or by speaking directly to HMRC’s debt management team.

Should I ignore a tax bill from HMRC?
No. Ignoring a tax debt can lead to interest charges, late payment penalties, and further collection action by HMRC.