Payment of PAYE and VAT by direct debit

 At the time of the 2026 tax update on 23^rd June 2026, HMRC published a consultation on making payments of PAYE and VAT by direct debit mandatory to achieve more timely payment. Unpaid tax liabilities are costly for both taxpayers and for HMRC. Where taxpayers pay late, they incur interest and possible penalty charges.

The consultation runs until 11:59pm on 16^th August 2026 and feedback is sought from those who would be affected by this change. The document sets out the rationale behind the proposed introduction of mandatory payment by direct debit, the possible approaches to implementing direct debit payment for VAT and for PAYE and ideas to encourage compliance.

Background

Following the 2025 Spring Statement, HMRC updated their guidance to list payment by direct debit as the primary method of payment for PAYE and VAT. However, this has not led to a material increase in direct debit payments. The government are now consulting on proposals to make this mandatory.

While HMRC note that most taxpayers make payments of VAT and PAYE by the due date, a minority submit their returns by the deadline but fail to make the associated payment on time. Analysis by HMRC suggests that this is often due to oversight rather than an inability or an unwillingness to pay.

Currently, while an option to pay by direct debit exists, where the taxpayer does not take up that option, they need to initiate the payment manually and track deadlines to make sure it is not late.

HMRC are of the view that requiring payment by direct debit could be an administrative way to reduce the costs and administrative burdens associated with late payment. Once a direct debit is set up, the payment journey is automated following the submission of the return.

The consultation seeks evidence on:

• The benefits respondents expect to see (including automation and reduced administrative burden)
• The practical barriers and implantation issues (including bank account constraints, cashflow management and process change) and where exceptions or alterations may be needed
• The government acknowledge that some businesses may face challenges in paying by direct debit, such as managing cash flow.

The responses received to the consultation will inform the governments approach and the score of potential future changes.

Direct debit for VAT

Many businesses already pay their VAT by direct debit. However, payment is also made by the following methods:

• Bank transfer (faster payments, BAC’s, CHAPS, online and mobile banking)
• Debit or corporate credit card via HMRC’s online BillPay service
• Standing order (Annual Accounting Scheme Payments on Account only) and cheques or cash at a bank or building society (businesses authorised to make paper returns).

Most businesses submit quarterly VAT returns. Payments must be made one calendar month from the end of the accounting period to which the return relates. However, this is extended by seven days where the return is filed electronically and payment is made electronically.

Where payment is made by direct debit, once set the payment is collected three days after the due date.  Taxpayers are notified of the upcoming direct debit and the amount at least three working days before the payments is due.

As part of the consultation, the government want to understand why businesses which could use direct debit instead choose to use other electronic payment options, and what impact paying by direct debit would have on them.

Scope of direct debit payment for VAT

The UK Direct Debit Scheme can only be used in conjunction with a UK bank account. This means that taxpayers who do not have a UK bank account cannot pay by direct debit.

The VAT legislation currently only requires electronic payment where returns must be submitted electronically. Where a person is excepted from online filing, they are not required to make payments electronically, including by direct debit. Taxpayers may be excluded from electronic filing on religious grounds if they are a member of a religious society or order whose beliefs are incompatible with electronic communications or because it is not reasonably practicable for the taxpayer to file online because of age, disability, remote location or other valid circumstances.

Views are sought from those expected from online filing on how mandatory payment by direct debit may impact their business processes.

VAT payments on account

The VAT Payments on Account (POA) system applies to businesses with an annual VAT liability exceeding £2.3 million. Under the scheme, two payments are made towards the VAT bill in months 2 and 3, with the final payment being due alongside the VAT return in the month following the end of the accounting period. Such businesses must pay their VAT electronically but do not benefit from the seven day payment extension.

Direct debit payments are capped at £20 million. Consequently, if mandatory direct debit payment is introduced, payments above a certain threshold will be excepted. However, other means of electronic payment would remain available.

Direct debit for PAYE

Employers and pension providers can pay their PAYE in a variety of ways, including:

• Direct debit
• Bank transfer (faster payments, BAC’s, CHAPS, online and mobile banking)
• Debit or corporate credit card
• Cheques by post and at a bank or building society

Employers with at least 250 employees must pay their PAYE electronically, but can choose their preferred method of electronic payment.

Where payment is made electronically, payment must be made by the 22^nd of the following tax month. Where payment is made by cheque an earlier payment date applies and the cheque must reach HMRC by the 19^th of the following tax month.

Where payment is made by direct debit, collection is made shortly after the 22^nd of the month. If the return is filed after the 19^th of the month, the direct debit payment is collected four working days after the FPS is filed. HMRC will collect the amount shown in the return.

Small employers can make quarterly payments instead of monthly payments where their monthly bill is £1,500 or less. Under direct debit, the payment is collected shortly after the 22^nd of the tax month following the end of the quarter to which the payment relates (so shortly after the 22^nd October for the quarter to 5^th October).

Although some employers pay direct debit, most use forms of electronic payment which require them to initiate each payment individually. The government want to understand why businesses who could use direct debit for PAYE payments instead choose to use other forms of electronic payment and also what the impact on the business would be if payment by direct debit became mandatory.

 Scope and exceptions

If the government decide to make it mandatory for employers to pay their PAYE by direct debit, this is likely to apply to all employers unless they are covered by an exception.

As noted above in relation to VAT, where a taxpayer is digitally excluded, it may not be appropriate for them to make payments of PAYE by direct debit.

The direct debit limit of £20 million will also prevent some very large employers from paying their PAYE by that method. However, other electronic payment methods will remain available to them.

Incentives and sanctions

The government plan to use a carrot and stick approach to encourage compliance if they go ahead with proposals to make payment of VAT and PAYE by direct debit mandatory.

For PAYE, cheque payments must reach HMRC by the 19^th of the following tax month, whereas if payment is made electronically, a later deadline of the 22^nd of the following tax month applies. The government are considering restricting the three day extension for electronic payments to payments by direct debit only.

 For VAT, a seven day payment extension applies where the return is filed electronically and payments are made electronically. To encourage direct debit payments, the government are considering restricting the payment extension so that it only applies to payments by direct debit.

They are also considering introducing a penalty where the taxpayer could pay by direct debit (and is not excepted from direct debit payment), but pays using another method.

The consultation seeks view on the use of penalties where payment is not made by direct debit and also what other sanctions could be used.