Paying HMRC: pitfalls and best practices

Paying HMRC (Her Majesty's Revenue and Customs) is a critical responsibility for individuals and businesses in the UK. While the process may seem straightforward, several pitfalls can lead to penalties and complications. This article explores the different HMRC accounts, available services, common pitfalls, and best practices to ensure smooth and timely payments.

HMRC uses just two banks accounts whose details are below (just click on the one you need to see the details):

Sending payment to the correct place

When paying HMRC by bank transfer, the default account is Cumbernauld, but they are instances where HMRC will instruct you to use Shipley instead. If you use the correct reference and pay at Cumbernauld, you should be fine but it's best to follow HMRC instructions. But because there are only 2 accounts to send money to, it's critical to use the correct reference or you can be sure that your payment will be lost. Here is a list of the most common taxes you might have to pay and the reference you need to use to ensure proper allocation:

1. Self-Assessment Tax:
   • Purpose: For individuals and sole traders who report income and pay income tax, National Insurance, and capital gains tax.
   • Common Pitfalls: Missing the January 31 and July 31 deadlines can result in late filing penalties and interest charges.
   • Payment Reference: Your 10-digit Unique Taxpayer Reference (UTR) followed by the letter ‘K’
2. Corporation Tax Account:
   • Purpose: For companies to pay corporation tax on profits.
   • Common Pitfalls: Failing to pay within nine months and one day after the end of the accounting period can result in interest on the unpaid tax.
   • Payment Reference: Your 17-character Corporation Tax payslip reference number. While it's preferable to use the payslip, it's possible to reconstruct that reference as it's constructed using the company UTR plus A and a 2-digit number starting at 01 for the first period and subsequently increasing by 1 for every new filing.
3. PAYE (Pay As You Earn) Account:
   • Purpose: For employers to pay income tax and National Insurance contributions deducted from employees’ wages.
   • Common Pitfalls: Incorrect calculations or late payments can lead to penalties and interest charges. Also, if payments are late and sent with a partial reference, they will be allocated to the wrong period making it very difficult for you to reconcile payments down the road.
   • Payment Reference: Your 13-character Accounts Office reference plus a 4-digit number composed of the current tax year and month the tax relates to (for example if you send payment for August 2024, the 4-digit number would be 2508)
4. VAT (Value Added Tax) Account:
   • Purpose: For businesses to report and pay VAT on taxable sales.
   • Common Pitfalls: Missing quarterly deadlines or underreporting sales can attract significant penalties.
   • Payment Reference: Your 9-digit VAT registration number
5. CIS (Construction Industry Scheme) Account:
   • Purpose: For contractors and subcontractors in the construction industry to manage tax deductions.
   • Common Pitfalls: Incorrect deductions or late submissions can lead to penalties and affect cash flow.
   • Payment Reference : Same as PAYE above

Other Payment Options

While doing a bank transfer is the most common way to pay your taxes, it's not necessarily the easiest nor the safest way. For example, it's not always possible to transfer a large sum as most bank have daily limits in place and that might consequently force you to do multiple transfers over several days. Also, it's easier to make a mistake when doing a transfer than when using some of the other options. Here is the list of those options:

1. Online Payment Service:
   • Features: Allows payments directly through the HMRC website via debit/credit card, bank transfer, or online banking.
   • Best For: Quick payments with immediate confirmation.
   • Usage: Visit the HMRC website, select the appropriate tax payment section, and follow the instructions to make a payment.
2. Direct Debit (DD):
   • Features: Automates regular payments directly from a bank account.
   • Best For: Ensuring timely payments, avoiding late fees, and managing recurring obligations.
   • Usage: Set up Direct Debit through your HMRC online account. This can be done for various taxes, including VAT, PAYE, and Self-Assessment. This is the recommended option when available as it reduces risks of errors and late payments.
3. Telephone Payment Service:
   • Features: Enables payments over the phone using debit/credit cards.
   • Best For: Those without internet access or preferring telephone transactions.
   • Usage: Call the HMRC payment line and follow the prompts to make a payment using your card details.
4. Bank/Post Office Payments:
   • Features: Payments can be made at banks or post offices using payment slips.
   • Best For: Individuals who prefer in-person transactions.
   • Usage: Obtain a payment slip from HMRC and take it to your bank or post office to make a payment.

Common Pitfalls when Paying HMRC

1. Late Payments:
   • Issue: Missing payment deadlines can result in interest charges and penalties.
   • Solution: Set reminders for key dates and consider using Direct Debit for automatic payments when available.
   • Example: Setting up calendar alerts for January 31 and July 31 for Self-Assessment payments.
2. Incorrect Amounts:
   • Issue: Underpaying or overpaying can complicate your tax affairs and lead to additional costs.
   • Solution: Double-check calculations and use HMRC’s online tools for accuracy.
   • Example: Using accounting software to ensure calculations are done correctly.

Best Practices for Paying HMRC

1. Use Direct Debit: This automates the payment process, ensures timely payments, and reduces the risk of late fees. It can be done through your HMRC online account for the relevant taxes.
2. Maintain Accurate Records: It helps ensure accurate payments and simplifies the process of filing returns. Keep detailed records of all income, expenses, and payments made to HMRC through your bookkeeping package or by using a spreadsheet.
3. Set Reminders: You can use calendar alerts, your accounting software, or reminder apps to setup alerts and avoid missing deadlines and incurring penalties. Even if you use Direct Debit, it's important to ensure that you have enough funds to pay your tax bills and reminders is a good option as well for that.
4. Regular Reviews: Periodically review your tax obligations and payments, ideally with a professional accountant to ensure ongoing compliance and identify any discrepancies early.
5. Professional Advice: Engaging a qualified accountant or tax advisor for personalised advice and support and to provide expert guidance gives you a second pair of eyes to avoid errors and oversights.

Conclusion

Knowing how to pay HMRC is critical and that requires attention to detail and proactive management. By understanding the different accounts and references required, avoiding the common pitfalls, and following best practices, you can ensure compliance and minimise the risk of penalties. Whether you are an individual taxpayer, a sole trader, or a business owner, taking a systematic approach to managing your HMRC payments will lead to smoother financial operations and peace of mind.