Changes to Lower Value Tax Debts: HMRC Bank Deduction Plans

A business can fall behind with a relatively modest VAT or PAYE liability after one difficult trading quarter. Because the amount is not substantial enough to trigger immediate court action, some directors assume HMRC will give it less attention.

That assumption may become increasingly dangerous. The government is consulting on a new automated process for recovering lower value tax debts through monthly deductions from UK bank and building society accounts.

The proposals are not yet law. However, they show that HMRC wants a practical enforcement tool for taxpayers who can make payments but repeatedly ignore collection letters, calls and other contact attempts.

Quick Answer

• The proposals are currently at the consultation stage and are not confirmed law.
• HMRC does not presently expect the measure to cover total debts above £5,000 for individuals or £10,000 for companies, although the final limits remain undecided.
• It would apply only after HMRC’s standard collection process had been exhausted and the taxpayer had persistently failed to engage.
• HMRC is considering a 14-day Pre-Deduction Notice before the first monthly deduction.
• Taxpayers could object because of an HMRC error, financial hardship, additional support needs or third-party ownership of funds.

What Are Lower Value Tax Debts Under HMRC’s Proposal?

Lower value tax debts would be established HMRC liabilities that fall within proposed upper limits and remain unpaid after repeated collection attempts. The indicative limits are £5,000 for individuals and £10,000 for companies, including accrued penalties and interest at the point HMRC considers taking action.

These figures are not final thresholds. The consultation states that the upper limits have not yet been decided and seeks views on what would be proportionate.

HMRC would consider a taxpayer’s total debt across different tax regimes rather than examining each liability separately. The measure could therefore cover a combination of:

• Self Assessment Income Tax
• VAT
• PAYE and National Insurance
• Corporation Tax
• Stamp taxes
• Tax penalties
• Accrued interest

For example, a company owing £2,000 in VAT and £1,500 in PAYE would have a combined tax debt of £3,500 for the proposed eligibility test. Splitting liabilities across different taxes would not prevent them from being considered together.

Read: Employing Family Members in a UK Business: Why HMRC Is Asking Tougher Payroll Questions

Why Is HMRC Targeting Smaller Tax Debts?

HMRC is targeting smaller tax debts because many remain unresolved after letters, calls and referrals to debt collection agencies. Traditional enforcement methods can also cost too much to use efficiently against modest liabilities.

Official analysis indicates that approximately 4.8 million individuals and companies hold debts within the indicative limits. These represent around 11.5 million separate debts, with a combined value of about £4 billion.

Each year, more than 750,000 lower-value debts worth over £2 billion are returned to HMRC after debt collection agencies have been unable to secure payment. HMRC believes the absence of a scalable enforcement process may encourage some taxpayers to assume that smaller liabilities will not be pursued.

HMRC already resolves more than 95% of tax debt by value each year. Its concern is the remaining population of older debts where the taxpayer has repeatedly declined to communicate.

How Would HMRC Tackle Lower Value Tax Debts?

HMRC would tackle lower value tax debts by instructing a bank or other deposit-taking institution to make fixed monthly deductions from a taxpayer’s account. The proposed process would begin only after normal collection activity and opportunities to agree a voluntary payment plan had failed.

The likely process would be:

1. A tax liability becomes final and remains unpaid.
2. HMRC sends reminders and attempts to contact the taxpayer.
3. The case may be referred to a debt collection agency.
4. HMRC confirms that standard collection routes have been exhausted.
5. HMRC issues a formal Pre-Deduction Notice.
6. The taxpayer receives a final opportunity to pay, arrange Time to Pay or object.
7. If no action is taken, HMRC instructs the bank to begin monthly deductions.

The Pre-Deduction Notice would state the debt amount, penalties and interest, proposed monthly payment, deduction date and planned payment period. HMRC is considering allowing 14 days between issuing the notice and making the first deduction.

The 14-day period is only a consultation proposal. It is not yet a statutory deadline.

Which Debts and Taxpayers Would Be Within Scope?

The proposed power would cover individuals and companies with final, legally enforceable HMRC debts who have persistently failed to engage. It would not be a first response to a recently missed payment.

The following cases would be expected to fall outside the proposed process:

• Debts subject to an active appeal
• Liabilities under an ongoing enquiry or compliance review
• Recent debts still within HMRC’s standard collection cycle
• Debts covered by an agreed Time to Pay arrangement
• Cases already subject to another enforcement arrangement
• Taxpayers without an identifiable UK bank or building society account
• Overseas bank accounts

A disputed liability should not qualify merely because HMRC has issued an assessment. The amount would need to be final and legally enforceable, with the normal appeal process completed or expired.

This distinction matters. A taxpayer who disagrees with an assessment must challenge the underlying liability through the correct appeal route. Ignoring collection correspondence is not an effective way to preserve appeal rights.

What Safeguards Would Apply Before Bank Deductions?

HMRC proposes safeguards covering notice, affordability, additional support needs, objections, independent review and possible tribunal oversight. Automation would be paused where the available information suggests that human judgement is required.

The proposed safeguards include:

• More than 10 attempts to contact the taxpayer before using the power
• A formal notice before deductions begin
• Opportunities to disclose financial hardship or support needs
• Manual review by trained HMRC staff
• The right to object before or during the payment schedule
• An independent HMRC review of an objection
• A possible external appeal to a tribunal or court
• Refunds and compensation for charges caused by HMRC errors

HMRC proposes allowing objections where:

• HMRC has made a factual or procedural error
• The deductions would cause financial hardship
• The taxpayer requires additional support
• Funds in the account belong to another person
• A joint account holder has a beneficial interest in the money

An objection would pause deductions while HMRC reviewed the case. The proposed appeal route has not been finalised, although HMRC is considering a timeframe similar to the usual 30-day tax appeal deadline.

A complaint would be different from an objection. Complaining about HMRC’s service would not automatically stop deductions, although HMRC could intervene where its investigation identified an error or serious procedural failure.

Also Read: HMRC Automatic Bank Deductions: What Beneficiaries Must Know Now

How Would HMRC Decide Whether Monthly Deductions Are Affordable?

HMRC is considering using tax records, business information and credit reference data to estimate affordable monthly payments. The final methodology has not been decided and forms a significant part of the consultation.

For individuals, HMRC might consider PAYE information, Self Assessment returns and other income records. For businesses, it could consider VAT turnover figures or recently filed accounts.

The consultation also considers applying HMRC’s existing Time to Pay affordability principle. This generally means that debt repayments should not exceed 50% of the taxpayer’s disposable income.

However, an automated assessment may not reflect current circumstances. Historical profits, turnover or PAYE data may give an inaccurate picture after redundancy, illness, loss of a customer or a sudden decline in trading.

Taxpayers would therefore need to contact HMRC promptly where the suggested payment creates hardship. Financial difficulty would not automatically exclude someone from the process if they continued to ignore HMRC.

Under the current proposal:

• There would be no standard payment-plan length.
• Payment periods could vary according to debt and affordability.
• Penalties associated with the debt would stop accruing once deductions began.
• Interest could continue until the balance was cleared.
• HMRC is not currently proposing a fixed minimum balance that must remain in the account.

These details remain subject to consultation and could change before legislation is drafted.

How Is the Proposal Different From Existing Direct Recovery of Debts?

The proposed system would collect smaller liabilities through recurring instalments, while existing Direct Recovery of Debts normally involves holding and removing a lump sum. Existing DRD also has different thresholds and safeguards.

Under current DRD rules, HMRC can use bank information to recover established debts of more than £1,000. It must leave at least £5,000 available across the taxpayer’s accounts after placing the hold.

Existing DRD is largely manual. It involves obtaining bank information, placing money on hold and allowing the taxpayer 30 calendar days to object before funds are transferred.

The proposed lower-value system would instead:

• Operate through regular monthly deductions
• Be designed for high-volume use
• Use automated eligibility and affordability checks
• Potentially have a 14-day initial notice period
• Apply without the existing £5,000 protected account balance, provided the instalments pass affordability checks

HMRC restarted existing DRD through a controlled test phase in September 2025 and began a wider rollout from April 2026. The new monthly instalment proposal is separate and would require legislation before HMRC could use it.

What Should You Do If You Owe Smaller Tax Debts Now?

You should contact HMRC as soon as you know that a tax payment cannot be made in full. Early engagement provides more options than waiting for the debt to move into enforcement.

HMRC may agree to a Time to Pay arrangement where the proposed payments are realistic and affordable. Taxpayers setting up a plan should prepare details of their income, regular spending, assets, savings and other tax liabilities.

Companies may also be asked how they can reduce the debt by releasing assets, obtaining finance or introducing funds. HMRC will expect a company’s proposal to address both the overdue balance and its ability to meet future tax payments.

As at 16 July 2026, the main HMRC late-payment interest rate is 7.75%, applying from 9 January 2026. The rate is linked to the Bank of England base rate and can change, so it should be checked again before publication.

Ignoring the debt can lead to:

• Referral to a debt collection agency
• Recovery through PAYE or pension income
• Taking Control of Goods
• Direct recovery from bank accounts
• Court proceedings
• Bankruptcy or company winding-up action in serious cases

HMRC should provide notice before taking enforcement action, but continued non-engagement substantially reduces the opportunity to agree a voluntary solution.

Where an HMRC letter appears incorrect, retain the correspondence and supporting records. Consider obtaining advice before making admissions or agreeing to a payment schedule. 

FAQs About Lower Value Tax Debts

Can HMRC Take Money From My Bank Account Now?

Yes, HMRC already has Direct Recovery of Debts powers in limited circumstances. Existing DRD normally applies where more than £1,000 is owed and at least £5,000 would remain available across the taxpayer’s accounts. The proposed automated monthly deductions for lower-value debts are separate and are not yet law.

Could HMRC Use a Joint Bank Account?

Under the proposal, HMRC would consider a joint account only where no suitable sole account existed or a sole account held insufficient funds. A non-debtor joint account holder would be able to object where the money belonged to them. The final joint-account rules have not yet been legislated.

Would a Time to Pay Agreement Prevent Automatic Deductions?

An active and agreed Time to Pay arrangement would be outside the proposed automated deduction process. Taxpayers must maintain the agreed payments and keep up with new tax liabilities. A failed arrangement could lead HMRC to reconsider enforcement options.

Would Interest Stop Once Monthly Deductions Begin?

The consultation proposes stopping further penalties associated with the debt when instalment deductions begin. It does not propose stopping late-payment interest, which may continue until the balance is cleared. The precise interest treatment should be confirmed in any final legislation.

Can I Object Because I Cannot Afford the Proposed Payment?

Yes. Financial hardship is one of the proposed grounds for objection, and an objection would pause deductions while HMRC reviewed the case. You should provide current evidence of income, essential expenditure, cash flow and other debts rather than relying on a general statement that the payment is unaffordable.

Do I Need an Accountant to Deal With an HMRC Tax Debt?

An accountant is not legally required, but professional support can help verify the liability, correct returns, prepare affordability evidence and negotiate a realistic payment proposal. Advice is particularly valuable where the debt covers several taxes, the amount is disputed or HMRC is considering enforcement action.

How Can Apex Accountants Help With HMRC Tax Debt?

Apex Accountants can review how the liability arose, reconcile HMRC’s figures, identify errors and prepare a practical proposal for payment. Where the matter involves disputed assessments or formal enforcement, our HMRC tax investigation services can support communication and representation.

The sensible next step is to address the debt before HMRC exhausts its standard collection process. Book a consultation to discuss the liability, available payment options and any urgent HMRC correspondence.