Can't pay your tax bill? What a Time to Pay arrangement actually involves

There is a particular silence that follows working out that the tax bill is bigger than the bank balance. Most owners respond to it by doing nothing for a fortnight, on the reasonable-sounding theory that a good month might fix it. That fortnight is the single most expensive decision in the whole episode, because HMRC's treatment of a business that cannot pay is almost entirely determined by whether the business rang up before or after HMRC started chasing.

A Time to Pay arrangement is simply an agreement to pay a tax debt in instalments instead of in one go. HMRC agrees hundreds of thousands of them. It is a normal administrative process, not a confession of failure, and for VAT, PAYE and Self Assessment a large share of them can now be set up online without speaking to anyone.

What a Time to Pay arrangement actually is

It is not a write-off, a holiday or a negotiation about how much you owe. The debt stays the same, interest keeps running, and you commit to a schedule of direct debits that clears the balance by an agreed date. In return, HMRC stops the collection process — no enforcement agents, no debt collection agency, no winding-up petition — for as long as you keep to the schedule.

The important structural point is that HMRC is not testing whether you deserve a plan. It is testing whether the plan will actually be paid. That is why the questions you get asked are about affordability rather than apology, and why proposing a schedule you cannot sustain is worse than proposing a slower one you can.

The online plans, and who qualifies

Three self-serve routes cover most small businesses, and each has its own conditions.

For Self Assessment, you can set up a payment plan online if you owe £30,000 or less, you are up to date with your tax returns, and you have no other tax debts or HMRC payment plans running. The online route typically spreads the balance over up to 12 monthly direct debits.

For VAT, the online service is open to businesses that owe £100,000 or less, have missed the payment deadline, have filed their returns, have no other HMRC plans or debts, and whose debt relates to an accounting period beginning in 2023 or later. It is closed to businesses using cash accounting, annual accounting, or making payments on account — those still have to phone.

For employers' PAYE, you can apply online if you owe £100,000 or less, the debt is five years old or less, you can clear it within 12 months, your PAYE and CIS returns are filed, and again there are no other plans or debts outstanding.

Above those limits, or if you need longer than the online service offers, the plan still exists — you simply have to ring HMRC's payment support line and make the case in person. Larger and longer arrangements are agreed regularly. They just are not automatic.

What it costs

Interest is the part people forget to budget for. HMRC's late payment interest rate is set at the Bank of England base rate plus four percentage points, and with base rate held at 3.75% it has stood at 7.75% since 9 January 2026. It runs from the original due date until the debt is cleared, including throughout the payment plan.

Put real numbers on it. Say a sole trader owes £14,000 on 31 January and spreads it over 12 monthly instalments of about £1,167. The balance falls steadily from £14,000 to nil, so the average amount outstanding across the year is roughly £7,600. At 7.75% that is about £590 of interest for the year — a real cost, but a fraction of what the same £14,000 would cost on a credit card, and considerably less than the penalty position if you simply let it run.

Penalties are the other half of the arithmetic, and they are where early contact pays. On VAT, a first late payment penalty of 3% of the outstanding tax bites once the payment is 16 or more days late, a further 3% of what is still owed at day 30 is added when it reaches 31 days, and from day 31 a second penalty accrues daily at an annualised 10%. HMRC's published position is that agreeing a Time to Pay arrangement can mean lower or no late payment penalties — which is the practical argument for making the call in the first fortnight rather than the second month.

HMRC is not deciding whether you deserve a payment plan. It is deciding whether the plan will get paid. Those are very different questions, and only one of them is about you.

What HMRC will ask you

Whether online or on the phone, the questions are financial. What you owe and for what. What you have in the bank. What is coming in over the next few months and what is going out. Whether you can raise the money elsewhere — a genuine question, not a trick one, because HMRC's starting position is that it is a creditor of last resort rather than a cheap lender.

Two things to prepare before you make contact. First, a simple 13-week cash-flow forecast: weekly income, weekly outgoings, closing balance. It is the document that turns a request into a proposal, and it is the same forecast that makes every other money conversation easier — the difference between cash flow and profit is exactly what it exposes. Second, a monthly figure you are genuinely confident of paying, tested against your quietest month rather than your best one.

Be aware that a plan comes with an implicit condition: you also have to keep paying everything that falls due from now on. A business that agrees to clear last quarter's VAT while quietly falling behind on this quarter's has not solved anything, and HMRC will treat the new arrears as a broken arrangement.

What happens if you say nothing

The escalation is predictable and reasonably slow, right up until it is not. Automated demands, then a debt management letter, then a phone campaign, then referral to a debt collection agency acting for HMRC. Beyond that, HMRC can instruct enforcement agents to take control of goods, recover the debt through the courts, and — for a company — petition to wind it up. A winding-up petition is the point at which the bank typically freezes the account, which usually ends the business rather than the argument.

Directors should also know that unpaid PAYE and VAT are the debts most likely to be examined personally later. Where a company fails owing tax, the conduct that led there gets reviewed, and what a lender or an insolvency practitioner looks at tends to include whether tax money was collected from customers and staff and then spent on something else.

The version that works

The businesses that come out of this cleanly do four things. They ring early, before the penalty clock has done its damage. They propose a monthly figure that survives a bad month, rather than the biggest number they can imagine paying. They set the direct debit for a date shortly after their own busiest receipts land, not on the 1st out of habit. And they fix the mechanism that caused it — usually by moving the tax money out of the current account the day it is collected, rather than trusting themselves not to spend it.

A Time to Pay arrangement is a symptom-level fix. It buys the months. What it does not do is change the pattern that produced a bill you had already spent, and that pattern is worth confronting while the relief of having a plan is still fresh.

Common questions

How long will HMRC give me to pay a tax bill?

The online self-serve plans are built around clearing the debt within 12 months, and that is the default HMRC will offer for Self Assessment, VAT and employers' PAYE arrangements set up on the website. Longer arrangements exist but have to be agreed by phone, and they are decided on affordability: HMRC wants the shortest schedule your figures genuinely support, not the longest one you would prefer. Expect to be asked for income and outgoings, and expect the answer to be shaped by whether you have kept up with current tax payments as well as the arrears you are asking to spread.

Does HMRC charge interest on a Time to Pay arrangement?

Yes. Late payment interest runs from the original due date until the balance is cleared, throughout the plan. The rate is the Bank of England base rate plus four percentage points, which has meant 7.75% since 9 January 2026 with base rate at 3.75%. On a £14,000 bill spread over 12 monthly instalments, the average balance outstanding is roughly £7,600, so the interest cost is around £590 across the year. Interest is not negotiable and is not waived because a plan has been agreed — only penalties are potentially affected by asking early.

Can I set up a VAT payment plan online?

Often, yes. The VAT self-serve route is open to businesses owing £100,000 or less that have missed the payment deadline, filed all their returns, have no other HMRC payment plans or debts, and whose debt relates to an accounting period beginning in 2023 or later. It is not available if you use the cash accounting scheme, the annual accounting scheme, or make payments on account — those businesses have to ring HMRC instead. The equivalent Self Assessment service covers debts of £30,000 or less where your returns are up to date.

What happens if I miss a payment on a Time to Pay arrangement?

The arrangement is cancelled and the whole remaining balance becomes payable immediately, which puts you back into the collection process with less goodwill than you started with. The fix is to ring HMRC before the payment is missed rather than after: a schedule can sometimes be re-profiled if the reason is credible and the request comes in advance. Missing payments silently is what triggers escalation — referral to a debt collection agency, enforcement agents taking control of goods, and for a company, ultimately a winding-up petition that will usually freeze the bank account.