PAYE Errors and Penalties: A Guide for UK Employers
HMRC charges a penalty of up to 5% of unpaid PAYE tax and National Insurance for payments that arrive more than six months late, and late RTI filing penalties start at £100 per month for the smallest employer schemes [1][2]. For businesses running payroll in-house, the combination of real-time reporting under RTI and a multi-tier penalty regime means a single workflow failure can trigger costs that compound across the tax year.
Every UK employer operating a PAYE scheme must send a Full Payment Submission to HMRC on or before each payday [3]. A late or incorrect submission is not simply an administrative inconvenience: HMRC's RTI system flags it in near real time, and the downstream effects can include penalties, interest charges and, in the case of prolonged errors, a formal compliance review.
This guide sets out the most frequent sources of PAYE error, the exact penalty rates for late filing and late payment, and the steps an employer can take to correct mistakes and appeal where appropriate. For a broader overview of employer National Insurance obligations, see the national insurance contributions guide on the Moonworkers blog.
Key takeaways
- Late RTI filing penalties range from £100 to £400 per month, scaled by the number of employees in the scheme.
- The first missed submission in a tax year is generally treated as a warning, not an immediate financial penalty.
- Late PAYE payment attracts a penalty of 1% to 4% of the tax owed, escalating with repeated defaults, with an additional 5% surcharge after six months.
- Inaccuracy penalties range from 0% to 100% of the potential lost revenue, depending on whether the error was careless, deliberate or concealed.
- Employers have 30 days to appeal a penalty, and a reasonable excuse (such as a serious IT failure or unexpected illness) can result in the penalty being cancelled.
The most common PAYE errors
Incorrect or out-of-date tax codes
HMRC issues tax codes to tell employers how much income tax to deduct from each employee's pay. The standard code for the 2026-27 tax year is 1257L, reflecting the £12,570 personal allowance [3]. An employer who applies the wrong code, whether through a data-entry error, a failure to act on a P6 or P7X notice, or an emergency code left in place too long, deducts the wrong amount of tax in every payrun until the error is corrected [4].
HMRC updates millions of tax codes each April and issues in-year changes via P6 notices throughout the year. Payroll software that holds the HMRC Recognised badge processes these updates automatically, but schemes that rely on manual entry are exposed to a lag that can result in underpayment or overpayment of income tax for every affected employee [3].
Late or inaccurate RTI submissions
Under Real Time Information, every employer must send a Full Payment Submission on or before the date employees are paid [1]. HMRC allows a small number of exceptions, including a three-day administrative grace period and a seven-day window for new starters paid below £129 per week, but these exceptions are narrow and require a valid reason code in the submission [3].
Common errors beyond timing include submitting the wrong pay figure, omitting employees from the FPS, or sending an Employer Payment Summary in months when a Full Payment Submission should have been sent instead [1]. Each category of error has different correction routes and, in some cases, different penalty exposure.
Penalties for late RTI filing
HMRC's late filing penalty for RTI is a monthly fixed amount tied to the number of employees in the PAYE scheme [1]. The first failure in a tax year is treated as a warning with no financial penalty. Every subsequent late submission in the same tax year attracts the charge below.
| Employees in the scheme | Monthly penalty |
|---|---|
| 1 to 9 | £100 |
| 10 to 49 | £200 |
| 50 to 249 | £300 |
| 250 or more | £400 |
Where a submission remains outstanding for more than three months, an additional automatic penalty of £300 or 5% of the liability shown on the return (whichever is greater) is added [1]. For a small employer missing three monthly submissions, the running total can reach £600 before the three-month surcharge applies.
HMRC-recognised payroll software submits the FPS automatically at the end of each payrun, removing the risk of a missed deadline from the employer's workflow entirely.
Penalties for late PAYE payment
The penalty structure for late payment of PAYE and National Insurance is separate from the filing penalty and operates on a sliding scale based on the number of defaults in a tax year [2]. The first late payment in a tax year does not attract a penalty. From the second default onwards:
| Defaults in the tax year | Penalty rate |
|---|---|
| 1 (first default, no penalty) | 0% |
| 2 to 4 | 1% of the tax unpaid |
| 5 to 7 | 2% of the tax unpaid |
| 8 to 10 | 3% of the tax unpaid |
| 11 or more | 4% of the tax unpaid |
An additional surcharge of 5% of the amount remaining unpaid is levied at the six-month point and a further 5% at the twelve-month point [4][5]. HMRC also charges interest on unpaid PAYE from the day after the due date.
For accountants managing payroll for multiple clients, automated payment reminders and real-time liability tracking are essential controls. A single missed payment for one client can establish a default that raises the penalty rate for every subsequent late payment in that scheme for the rest of the tax year.
Penalties for inaccuracies
Where an error in a submission results in the wrong amount of PAYE or National Insurance being assessed, HMRC applies an inaccuracy penalty calculated as a percentage of the potential lost revenue [9]. The percentage depends on the behaviour that caused the error.
| Error type | Penalty range | Notes |
|---|---|---|
| Reasonable care taken | 0% | No penalty where the employer took appropriate steps |
| Careless (no reasonable care) | 0% to 30% | Reduced by quality and timing of disclosure |
| Deliberate but not concealed | 20% to 70% | Higher floor reflects intentional non-compliance |
| Deliberate and concealed | 30% to 100% | Applies to active suppression of PAYE liabilities |
Unprompted disclosure, that is, reporting the error before HMRC has raised it, can reduce a careless inaccuracy penalty to nil and brings the maximum down significantly for more serious failures [9]. Employers who identify an inaccuracy in a submitted FPS should correct it in the next submission or contact HMRC directly rather than waiting.
A compliance review triggered by persistent inaccuracies will typically examine tax codes, treatment of new starters and leavers, expense payments, benefits in kind and NI category assignments. Firms using an HMRC-recognised payroll API reduce exposure in these areas because the calculation logic is maintained to HMRC's own software-developer specifications.
How to appeal a PAYE penalty
An employer has 30 days from the date of the penalty notice to appeal [6]. The appeal is made through HMRC's PAYE Online for Employers service under the "Appeal a penalty" option, or by writing to the address on the notice [7].
A successful appeal requires the employer to demonstrate a reasonable excuse. HMRC accepts serious illness, a critical IT failure, or an unexpected banking problem as potentially valid, provided the employer took corrective action as soon as the problem was resolved [6]. Cash-flow difficulties do not constitute a reasonable excuse.
If HMRC rejects the appeal, the employer can request an internal review by a different HMRC officer, or proceed directly to the First-tier Tax Tribunal. Where the penalty is material, professional advice before the tribunal stage is a worthwhile investment. Payroll bureaux handling appeals across multiple client schemes typically benefit from the audit trail built into a multi-client payroll dashboard.
Conclusion
PAYE penalties are not a static risk: they accumulate month by month and scale with the size of the scheme. The combination of late filing penalties, late payment surcharges and inaccuracy penalties means a sustained period of payroll errors can produce a substantial liability before HMRC formally intervenes. The most effective control is removing manual steps from the payrun, because most PAYE errors trace back to a person doing something a payroll system should handle automatically.
The RTI regime has been in place since 2013, and HMRC's detection capability has grown steadily alongside it. Employers still managing payroll through spreadsheets or legacy tools face a different compliance risk profile from those whose SME payroll platform handles FPS timing, code updates and payment calculation natively. The cost of getting these things right has risen with the April 2026 rate changes: the case for automation is stronger than ever.
Frequently asked questions
What is the penalty for sending an RTI submission late?
HMRC's fixed filing penalty for a late Full Payment Submission ranges from £100 to £400 per month depending on how many employees are in the PAYE scheme [1]. The first late submission in a tax year is treated as a warning with no financial penalty. Every subsequent late submission in the same tax year attracts the charge. An additional penalty applies where a submission remains outstanding for more than three months.
How many defaults are allowed before late PAYE payment penalties apply?
The first late PAYE payment in a tax year does not attract a default penalty [2]. From the second default onwards, penalties range from 1% to 4% of the tax owed depending on how many defaults have accumulated in the year. An additional 5% surcharge is levied on any amount still unpaid after six months, and a further 5% after twelve months.
Can an employer appeal a PAYE penalty?
Yes. Employers have 30 days from the date of the penalty notice to appeal through HMRC's PAYE Online service or in writing [6]. A reasonable excuse, such as a serious IT failure, unexpected illness or banking error, can result in the penalty being cancelled. Cash-flow problems do not constitute a reasonable excuse. Where HMRC rejects the appeal, further escalation to the First-tier Tax Tribunal is available.
What happens if HMRC finds a deliberate error in a PAYE submission?
Deliberate inaccuracies are subject to a penalty of 20% to 100% of the potential lost revenue, depending on whether the error was also concealed [9]. Active suppression of PAYE liabilities can result in a 100% penalty loading. HMRC may extend its investigation to earlier tax years and, in the most serious cases, pursue directors personally. Unprompted disclosure reduces the penalty significantly in borderline cases.
