Tax bills need to be paid on time otherwise interest and possibly penalties will accrue. HMRC is amenable to payment by instalments under the Time to Pay scheme should payment not be made by the due dates. However, if no contact is made, HMRC will commence its debt management process including passing the debt to its Debt Management and Banking department. Time to Pay should ideally be sought before the debt becomes due and, while there is no automatic right to pay tax by instalments after the due date, if an individual or business is experiencing temporary financial difficulty and meets certain criteria, HMRC is found to be approachable.
Initial contact
HMRC uses a variety of methods to pursue tax debts. In the first instance, it will start by issuing payment reminders in the form of letters, telephone calls and SMS texts. Although HMRC does not have a fixed timeline (dependent on the nature of the debt and the taxpayer's response), the collection process usually commences 30 days after the missed payment. Further letters and a final demand are issued within 30–90 days after initial notice. If ignored, further letters, including final demand letters or a Notice of Requirement to Pay are issued.
Debt collection agency
Further failure to pay may mean that collection is outsourced to a private debt collection agency (DCA). HMRC has started to use these debt collection agencies more and more in recent years and increasingly the time lag between issue of reminders and transfer to an agency is becoming shorter. Such agencies have their own reminder methods of letters and telephone calls. DCAs do not have direct access to HMRC’s systems, and cannot deal with any dispute over the amount of the debt. Be aware that if a Time to Pay (TTP) arrangement is in place for one tax, this does not necessarily mean that another department dealing with another tax will not seek collection. It is not unusual for a TTP arrangement to be made for corporation tax and VAT, for example, and for the taxpayer to receive letters from the DCA for personal tax.
Tax collection via coding notices
HMRC can alter individuals’ coding notices to collect self-assessment tax, contract settlement debts following an enquiry and tax credit overpayments by deduction at source from salary or pension. The amount that can be collected using this method varies depending on the taxpayer’s earnings. If a taxpayer earns less than £30,000 per annum, the amount is £3,000; if earnings are higher, up to £17,000 if the taxpayer earns in excess of £90,000. However, the limit for collecting self-assessment balancing payments and PAYE debts remains £3,000. If the amount owed exceeds these limits, the debts can be split (partially coded out).
Direct recovery of debts
HMRC’s Direct Recovery of Debts (DRD) is a procedure by which it can withdraw owed tax directly from taxpayers’ bank accounts. This process has been reinstated as of 6 April 2025 following suspension during the pandemic. DRD can only be considered for debts in excess of £1,000. There are a number of safeguards in place under these provisions, including the restriction that at least £5,000 remains in the taxpayer's bank account in most cases. Every debtor must receive a face-to-face visit from HMRC agents before their debts are subject to the process, being allowed 30 days to object before any money is transferred.
It should be noted that as from a date to be announced, HMRC may soon begin automating smaller debt recoveries. Broader powers (digital wallets, rental deposits, goods) are also being considered but will require legislative updates following consultation.
Court action
HMRC may initiate court action via the magistrates’ court often three to six months after the debt has arisen for tax debts of less than £2,000. For larger debts, the case will be heard in the county or high court. In practice, a county court judgment (CCJ) is generally only sought where its threat is believed likely to elicit settlement of the debt on the basis that the CCJ would impact a taxpayer's access to credit. For a company, HMRC will seek a winding-up petition.
