Here’s a question that catches a lot of employers off guard: what happens when your payroll says you owe your employee a massive PAYE refund, but your business doesn’t have the cash to pay it?
The short answer: yes, HMRC can help. But not always. Let me explain.
How PAYE refunds happen
Normally, running your business payroll each month means calculating PAYE tax and National Insurance contributions, then paying them over to HMRC. Simple enough.
But sometimes – usually because of a tax code change instigated by HMRC – your payroll calculations will show that an employee is owed money back. (Known as a PAYE refund).
For the employee, this refund gets added to their net pay. And here’s the important bit: as the employer, you are legally required to pay that net pay, including the PAYE refund. You can’t just say “sorry, we’ll sort it out later.”
For most employers, the amount of any PAYE refund is relatively minor and doesn’t make a real dent in the business cash flow. So, paying the employee isn’t a problem.
But sometimes? The PAYE refund is large. Really large. Bigger than the amount of PAYE and NIC you’re due to pay over to HMRC that month. Sometimes bigger than several months’ worth. And that’s when you’ve got a cash problem on your hands.
A real-life example
We had a client (let’s call them Company A), who’d just set up. The director had left a very well-paid job where they’d already paid a lot of PAYE tax that year. When they joined the new company’s payroll with a much more modest salary, the payroll system calculated they were due a PAYE refund of £6,700.
That’s potentially several years’ worth of the company’s PAYE and NIC contributions. In other words: the business simply didn’t have the cash to cover it.
So what do you do in this instance?
Applying to HMRC for payroll funding
If you find yourself owing a large PAYE refund to an employee (i.e. more than you can cover from your normal PAYE/NIC payments), you can apply to HMRC for an advance.
HMRC realises that there will be occasions when you, as the employer, need to pay your employees more than your usual payment to HMRC. Sometimes considerably more. In these circumstances, you can apply for funding to cover the excess.
Obviously, you can only get this funding if you’re up to date with your PAYE and NIC liabilities. If you’re behind on payments, HMRC won’t be rushing to help.
You can apply in two ways:
- Online: Log in via your Government Gateway and claim through the payroll funding page
- In writing: Apply directly to your HMRC Accounts Office
Once approved, HMRC will place funds into your business account so you can pay the PAYE refund to your employee. It’s not instant, but it does work.
| Dealing with a large PAYE refund and not sure what to do? Get in touch! We can help you apply for funding and make sure everything’s handled properly. |
What about year-end overpayments?
This is a slightly different situation, and it’s worth understanding the distinction.
The payroll funding scenario above is about needing an advance from HMRC to process a specific refund to an employee mid-year.
But what happens if, at the end of the tax year, your business has simply overpaid its PAYE and NIC liabilities overall? Not because of a one-off employee refund, just because the numbers didn’t add up and you paid more than you owed.
The answer is: you can claim that money back.
HMRC will want you to double-check all the figures first to ensure there are no mistakes. If they haven’t already contacted you about it (sometimes they send a letter or email), you can initiate the process yourself.
This is an annual process, so you can’t do it until after the tax year ends in April. Once you’re ready, you can claim online via your Government Gateway.
The key difference
To summarise:
- Mid-year PAYE refund to an employee (where you don’t have the cash) → Apply for payroll funding
- Year-end overpayment of PAYE/NIC by your business → Claim a refund after April
Both are legitimate ways to get money back from HMRC; they just apply to different situations.
Take the hassle out of payroll
Look, payroll is one of those things that seems simple until it isn’t. Tax codes change, employees come and go, PAYE refunds pop up out of nowhere, and suddenly you’re knee-deep in HMRC correspondence, wondering where it all went wrong.
If that sounds familiar, you don’t have to do it alone.
| Looking to take the strain and hassle out of dealing with payroll and HMRC? Outsource your payroll to JVCA – we act for loads of businesses to sort their payroll out, and we’d be happy to help you too. Get in touch to discuss how we can help. |
