There is a particular quality to the silence in an office at half past nine at night when you are looking at a bank balance and a payroll report on the same screen and they do not reconcile.
Everything about that month was ordinary. Sales were fine. The order book was fine. Nothing had gone wrong in any way you could point at in a meeting. And on the 21st, with wages due on the 28th, the money was not there.
The seven days
The figures are illustrative but the arithmetic is the arithmetic. Monthly payroll ran at £24,600 gross, which meant £19,100 of net wages leaving on the 28th, £6,900 of PAYE and National Insurance due to HMRC on the 22nd of the following month, and £1,100 of pension contributions due to the scheme by the 22nd.
The balance on the 21st was £11,400. Coming in, in theory: £14,800 from our largest customer on 40-day terms falling due on the 24th, and £6,200 that had been overdue since the 3rd.
So on paper it worked, as long as the big one paid on the day and the overdue one paid at all. Neither of those is a plan. Both of them are a hope with a date on it.
Wages are not just another bill
The instinct in a squeeze is to treat every creditor as one queue and pay whoever shouts loudest. Wages sit outside that queue, for reasons that are worth being blunt about.
Not paying contractual wages on the contractual date is a breach of contract and an unlawful deduction from wages, which an employee can take to an employment tribunal with no qualifying service and no fee. Repeated or serious failure is capable of amounting to a fundamental breach, which opens the door to resignation and a constructive dismissal claim from anyone with the service to bring one. And the quiet damage arrives long before any of that: the person who cannot pay their own direct debits because you were four days late is looking at job adverts by the weekend, whatever they say to your face.
The reassurance owners give themselves — that if the worst happened, staff would be protected — is only partly true. In an insolvency, employees are preferential creditors for arrears of pay, but only up to £800 each, for a period of four months before the relevant date. Accrued holiday pay is preferential without that cap. Everything above £800 of unpaid wages ranks as an ordinary unsecured claim alongside the trade creditors, with the National Insurance Fund picking up statutory amounts afterwards. £800 does not cover a month for most people.
There is a directors' point here too. Once insolvency is probable, your duty stops being to the shareholders and starts being to the creditors as a whole. Continuing to take on obligations you have no reasonable prospect of meeting is where wrongful trading exposure begins. Nearly missing payroll is precisely the moment to take advice, not the moment to press on and hope.
Every other creditor can be phoned. Payroll is the one bill where the conversation happens after the money was supposed to arrive.
The order we actually paid things in
We got through it, and the order we ended up using is the one we would use again.
Net wages first, in full, on the day. Then pension contributions, because those are employee deductions held on trust in all but name, they have a statutory deadline of the 22nd of the following month for electronic payment, and the Pensions Regulator treats late payment of them very differently from late payment of a supplier invoice. Then HMRC — but a part payment plus a phone call, not silence. Then the suppliers we needed the following week to keep working. Then everyone else, each with an actual date rather than a vague apology.
One thing we did right almost by accident: we kept filing. The Real Time Information Full Payment Submission has to be filed on or before payday whether or not the money leaves. Not paying is one problem; not filing is a separate penalty stacked on top of it, and it is the easiest one in the world to avoid.
HMRC is the most negotiable creditor you have
This is the single most useful thing we learned, and most owners discover it far too late. HMRC would rather have a realistic payment plan than an unrealistic default, and Time to Pay exists precisely for this.
The mechanics matter. For PAYE, penalties are charged as a percentage of the amount paid late, and the first failure to pay on time in a tax year does not count as a default at all. After that, one to three defaults in the year attract 1%, four to six attract 2%, seven to nine attract 3%, and ten or more attract 4%. On top of that, anything still unpaid after six months picks up a further 5%, and after twelve months another 5%. Daily interest runs on everything from the due date regardless.
Put real numbers on it. On our £6,900 of PAYE, a fourth default in the tax year would have cost £138 in penalty, plus interest, which is unpleasant but survivable. The 5% at six months would have been £345, and by then the debt would have been in enforcement rather than in a conversation. The gap between those two outcomes is entirely a function of whether you ring them in week one or week twenty. Getting an arrangement agreed before the due date is the version that keeps penalties off altogether, and how a Time to Pay arrangement actually works covers what they will ask you.
What the near miss changed
Five things, none of them clever.
We moved payday. Our largest customer had quietly shifted from paying on receipt to a single monthly payment run, and the gap between their run and our payday had drifted from six days to nineteen without anyone noticing. Moving payday four days later removed the entire problem for the cost of one letter to staff.
We opened an arranged overdraft while things were calm, because that is the only time you can. A facility you never use costs an arrangement fee and buys you the ability to make a decision on a Tuesday rather than a phone call on a Friday.
We started invoicing on completion rather than at month end, which on a business with a 40-day customer is worth up to four weeks of cash for no effort at all. Chasing late invoices without losing the client covers the other half of that.
We took deposits on new work. And the director's salary became the shock absorber rather than the last thing considered, deliberately and with the accountant told, because dropping your own pay and quietly running it through the director's loan account creates a different problem in nine months' time.
The forecast that would have caught it three months earlier
Everything above is remedial. The actual failure was that a thirteen-week rolling cash forecast would have shown the payday gap widening in month one, in a single line, in about twenty minutes a week.
Not a budget, and not a set of management accounts. A week-by-week list of money in with the date each customer actually pays rather than the date the terms say, money out with payroll, PAYE, VAT, rent and loan repayments on their real dates, and a running balance. When the running balance goes red in week nine you have nine weeks to fix it, and nine weeks is a completely different problem from seven days. A cash flow forecast a lender will believe is the same document, built once, doing two jobs.
The uncomfortable truth is that the business was profitable throughout. Profit was never the issue. Timing was, and timing is the thing that closes businesses that are otherwise doing perfectly well.
Common questions
What happens if you cannot pay staff wages on time?
Failing to pay contractual wages on the due date is both a breach of contract and an unlawful deduction from wages. An employee can bring a tribunal claim with no qualifying service and no fee, normally within three months less one day. Repeated or serious failures can amount to a fundamental breach of contract, allowing an employee with sufficient service to resign and claim constructive dismissal. Practically, the bigger cost is usually retention: people who cannot meet their own commitments because you paid late start looking elsewhere immediately. If you know you will be short, tell staff before payday with a specific date, not afterwards.
Should you pay HMRC or your staff first?
Staff, then pension contributions, then HMRC. Net wages are contractual obligations with immediate legal and human consequences, and HMRC is by some distance the most negotiable creditor you have. Pension contributions deducted from pay rank close behind wages because they are effectively employees' money and carry their own statutory deadline. With HMRC, the important thing is not silence: pay what you can, ring them, and ask about Time to Pay. An arrangement agreed before the due date generally avoids penalties, while a debt left unaddressed picks up percentage penalties and daily interest and eventually moves into enforcement.
Can you agree a Time to Pay arrangement for PAYE?
Yes. Time to Pay is HMRC's standard mechanism for spreading a tax debt over a realistic period, and it covers PAYE and National Insurance as well as VAT and Self Assessment. Some arrangements can be set up online within published limits; larger or more complex debts mean a phone call, where you should expect questions about why the money is not there, what income is coming, and what you can pay immediately. Interest continues to accrue, but an arrangement agreed before the due date generally prevents late payment penalties, and it stops the debt escalating into enforcement action.
Do you still have to file payroll if you cannot pay it?
Yes, and this is the cheapest mistake to avoid in the whole situation. The Real Time Information Full Payment Submission must be filed on or before the date you pay employees, entirely independently of whether the money reaches HMRC. Late filing carries its own penalty, charged monthly and based on the number of employees, which simply stacks on top of the late payment penalty and interest. The same principle applies to VAT returns: file on time even in a month you cannot pay, because a filed return with a payment problem is a conversation, and an unfiled return is an escalation.
