Using a Direct Debit to pay your PAYE - Pros and Cons

Being able to hang onto your money a few more days is always helpful, or alternately avoiding increasing your overdraft by a few days is also extremely helpful throughout the year.  Hence getting a few extra days each month on the PAYE payment is a welcome relief.

However, this requires a variable direct debit with HMRC and that can come with some drawbacks, at least until they fix the problems with their rather overzealous interest and penalty algorithms.  Some call it a lack of “..joined up thinking.”  I call it basic incompetence caused by a lack of genuine concern and empathy for the unpaid tax collectors of this country, the employers.

Without a doubt, the main driver for setting up a recurring variable direct debit authority to pay PAYE is the employer retains the funds for a bit longer. 

The normal payment date for PAYE paid electronically is the 22nd of the month, with a direct debit it can be anytime from the 23^rd on till the end of the month in some months.

The variable PAYE direct debit process is triggered by HMRC sending an advanced notification to the employer on the 20th of the month, but if that is not a working day the notification will land on the next working day. The money is then collected three working days after the notification arrives, if that collection day is also a banking day, otherwise it will be collected on the next banking day.

This built-in delay has been causing problems with the automated interest and penalty systems for late-paid PAYE. 

Gov.UK Link to set up dd mandate

Interest charges

This is how it is supposed to work:

PAYE due in November 2022, the notification was sent to the employer’s inbox on Monday 21 November, and the funds were taken on 24 November – simple and the employer retained for a further 2 days.

But as the due date for PAYE payment was 22 November, HMRC created an interest charge, automatically calculated for the period from 22 to 24 November and shown on the employer’s business tax account.  Apparently, that online account should also show the message “direct debit will collect” against the interest charge. 

When the PAYE is collected by direct debit the interest charge for the three days, 22 to 24 November, is reversed. If the PAYE can’t be collected by direct debit due insufficient funds in the bank account, the interest charge calculated from 22 November will stand.  This is understand able and acceptable.

Late payment notices

But, as we are now hearing, it appears that HMRC had not anticipated that the late payment penalty system would also kick in if the PAYE was not received by 22nd of the month. 

Employers have found that where they have set up the variable direct debit to collect PAYE they have received a late payment notification to remind them they haven’t paid. This may worry the employer and trigger more phone calls to the accountant or to HMRC.

One business owner who encountered this issue, commented that he received a late payment notice after his PAYE was collected by direct debit on 24 November. He said: ”This first one is just a warning, but I worry these warnings may turn into penalties…”

The Institute of Chartered Accountants in England and Wales (ICAEW) Tax Faculty has raised this matter with HMRC, which has admitted that suppression of the late payment notices made through the generic notification service (GNS) was not factored in when the variable direct debit system was designed.

HMRC has promised to make changes to the direct debit service to correct the issuing of late payment notices, but that will take some months to implement. 

When to set up the DD

To allow the banks and HMRC time to set up the variable direct debit the employer needs to start the process at least six working days before the payment due date. 

For PAYE due on 22 January the employer ideally needs to initiate the process by Friday 13 January. However, HMRC has the accounting bodies, that as long as a direct debit is set up by 17 January it will be able to collect the PAYE on 25 January (three working days after 20 January). 

Employers can also use the variable direct debit service to pay PAYE quarterly. If the direct debit is set up by 17 January the PAYE due for the quarter to 5 January 2023 (in other words tax months 7, 8 and 9) will be collected on 25 January. 

The direct debit payment should be notated on the bank statement as “HMRC SDDS”.

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