HMRC wants to change how businesses pay two of the biggest taxes they handle. In June 2026 it opened a consultation, Requiring payment of VAT and PAYE by Direct Debit, proposing that most VAT return liabilities and PAYE liabilities be collected automatically by Direct Debit rather than by the bank transfer, card payment or cheque that many businesses still use. This guide explains what is proposed, who would be affected, the exclusions, what it means for your cash flow, and what to do now. Important: this is a proposal, not law. No start date has been set.
What is HMRC's mandatory Direct Debit proposal?
HMRC's 2026 consultation proposes that VAT return liabilities and PAYE liabilities must be paid by Direct Debit, letting HMRC collect the tax automatically from your business bank account after each return. It runs from 23 June to 16 August 2026. Self Assessment and Corporation Tax are not in scope.
The stated aim is to reduce late and unpaid tax, cut incorrectly allocated payments, and lower the admin burden through automation. It is a Stage 2 consultation under HMRC's Tax Consultation Framework, so responses will shape a future policy that would need to pass through a Finance Bill. You can read the full document on GOV.UK. If you want to check what you have already paid, our guide on how to track tax payments to HMRC walks through the online account and the payment references.
Who would be affected, and who is exempt?
The proposal would affect around 87% of VAT and PAYE-registered businesses, roughly 2.73 million in total. Most businesses that pay by bank transfer, card or cheque would move to Direct Debit. A small number are excluded, mainly those without a UK bank account, the digitally excluded, and very large payments.
| Who may be excluded | Applies to |
|---|---|
| Businesses without a UK bank account (including overseas firms) | VAT |
| Businesses excepted from online filing (a religious-society objection to electronic communications, certain insolvency procedures, or where electronic filing is not reasonably practicable) | VAT |
| Employers who are digitally excluded (religious belief, disability, age or remote location) | PAYE |
| Single payments above £20 million (the BACS Direct Debit scheme limit) | VAT and PAYE |
If you are a new employer still setting up, our guide on how to register for PAYE as an employer covers the registration and payment basics you would need in place first.
How would collection actually work?
Collection would be automatic and tied to each return. For VAT, HMRC would take the payment three working days after the due date, telling you the date and amount at least three working days beforehand. For PAYE, HMRC would collect the amount from your Real Time Information return shortly after the 22nd.
| VAT | PAYE | |
|---|---|---|
| What triggers collection | Your submitted VAT return | Your PAYE Real Time Information (RTI) return |
| When HMRC collects | 3 working days after the payment due date | Shortly after the 22nd of the month |
| How the amount is set | The liability on your return, notified at least 3 working days before | The amount reported in your RTI return |
Because PAYE collection would be driven by the RTI figure, accurate payroll reporting matters even more. The same is true if HMRC extends real-time collection to other taxes over time, in the way that payrolling of benefits in kind becomes mandatory from April 2027. You can see the current payment routes on the GOV.UK pages for paying your VAT bill and paying PAYE.
What would it mean for your cash flow?
Mandatory Direct Debit removes the timing control some businesses rely on. Instead of choosing when to pay, you must hold cleared funds on HMRC's collection date every period. That helps you avoid late-payment penalties and interest, but it needs tighter cash-flow planning, especially in quarters where VAT and a big PAYE run land close together.
Worked example: a company has a £20,000 quarterly VAT bill and a £4,500 monthly PAYE bill.
| Liability | Return period | Due date | Approx. collection date | Amount |
|---|---|---|---|---|
| VAT | Quarter to 30 Jun 2026 | 7 Aug 2026 | around 12 Aug 2026 | £20,000 |
| PAYE | Month to 5 Aug 2026 | 22 Aug 2026 | shortly after 22 Aug 2026 | £4,500 |
Under the proposal, the business must have £20,000 of cleared funds ready by around 12 August and £4,500 by shortly after 22 August. It loses the option some use of paying manually at the last possible moment. The upside is that it will not miss a deadline. To put that in context, a £20,000 VAT bill paid 30 days late would cost roughly £127 in interest at the current 7.75% HMRC late-payment rate (£20,000 × 7.75% × 30/365). Automatic collection on a known date removes that risk, provided the money is there.
How to prepare for mandatory Direct Debit
You do not need to act on the proposal itself yet, because it is not law. What helps now is getting the basics ready: keep a business bank account with enough headroom, make sure your VAT and PAYE figures are accurate before you file, and build the collection dates into your cash-flow forecast.
- Keep a dedicated business bank account and hold a buffer for tax that is due but not yet collected.
- Check your VAT return and RTI figures before submission, since the collected amount would follow what you report.
- Forecast the quarters where VAT and PAYE fall close together so a large combined outflow does not catch you out.
- If cash flow is tight, speak to HMRC about a payment arrangement early rather than risking a failed collection.
If you want help getting your VAT and PAYE processes ready, our team can review your setup and reporting. See our VAT service, our support for limited companies, or book a free call.
Frequently asked questions
Will Direct Debit for VAT and PAYE definitely become mandatory?
Not yet. It is a proposal in an HMRC consultation that ran from 23 June to 16 August 2026. The government will review responses before deciding, and any change would need to go through a future Finance Bill. No start date has been announced.
Does the mandatory Direct Debit proposal cover Self Assessment or Corporation Tax?
No. The consultation is limited to VAT return liabilities and PAYE liabilities. Self Assessment and Corporation Tax are outside its scope, so how you pay those taxes would not change under this proposal.
Can I be exempt from paying VAT or PAYE by Direct Debit?
Some businesses would be excluded, including those without a UK bank account, businesses excepted from online filing, employers who are digitally excluded, and single payments above the £20 million BACS limit. The final exemptions depend on the consultation outcome.
When would mandatory Direct Debit start?
No implementation date has been set. HMRC has said any change would be introduced gradually to give businesses time to set up Direct Debit mandates, and it would follow legislation in a future Finance Bill.
What happens if there is not enough money in my account?
A Direct Debit can only be collected if there are cleared funds available, so keeping enough headroom in your business account matters. A failed collection could leave the tax unpaid and expose you to late-payment interest, currently 7.75%, so accurate forecasting is important.
