HMRC Time to Pay vs a Tax or VAT Loan

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HMRC Time to Pay vs a tax loan: the short answer

HMRC Time to Pay is a payment plan agreed with HMRC that lets a company pay an overdue tax bill in monthly instalments, with late payment interest charged. A tax or VAT loan is commercial borrowing from a lender that pays HMRC in full, with the company then repaying the lender over an agreed term.

Time to Pay depends on HMRC agreeing that the plan is realistic and affordable. A loan depends on a lender's own credit decision. The right choice depends on cost, timing, what HMRC will accept, and how comfortably the company can afford the repayments.

How HMRC Time to Pay works

GOV.UK explains that you may be able to set up a payment plan to pay an overdue tax bill in monthly instalments. HMRC will check whether the plan is affordable, and if a plan cannot be agreed, HMRC will ask for the full amount.

How to apply

HMRC provides an online service to check eligibility and set up a payment plan. According to GOV.UK, you will need:

The reference number for the tax you owe.
UK bank account details, and authority to set up a Direct Debit on that account.
Details of the company's income and spending.

If you cannot use the online service, you contact HMRC directly. GOV.UK says HMRC will want to know whether you can pay in full, how much you can repay each month, whether other taxes are owed, and details of earnings, usual monthly spending, and savings or investments.

What HMRC expects from a company

GOV.UK is clear that companies must reduce the debt as much as possible before a payment plan is set up. HMRC will check that the proposal is realistic and affordable. It may expect assets such as stock, vehicles and shares to be released, and directors may be asked to put in personal funds, accept lending or extend credit.

In other words, Time to Pay is not simply an alternative to borrowing. HMRC may ask whether the company has explored other ways to pay, which can include finance.

Interest charged

HMRC charges late payment interest on tax paid late. HMRC's published rate is the Bank of England base rate plus 4%, a margin that applies from 6 April 2025. GOV.UK notes that paying more quickly reduces the total, because less interest builds up. Penalties may also apply depending on the tax involved, so check the position with HMRC for your company.

How a tax or VAT loan works

A tax or VAT loan is borrowing from a lender, usually unsecured, used to pay HMRC on time or to clear an overdue amount. The company then repays the lender in fixed instalments, typically over a period of a few months to a year, depending on the lender and the tax involved.

HMRC is paid in full, so there is no HMRC payment plan to agree or keep to.
The lender sets the cost. Pricing varies between lenders and depends on the company's circumstances, and may include interest and fees.
Credit checks apply. Lenders run their own checks on the company and often on directors.
Personal guarantees are common. Directors are often asked to guarantee the borrowing. Read our guide to what a personal guarantee is.
Approval is not assured. Lenders set their own criteria, including minimum trading periods and turnover.

Our pages on VAT loans and tax bill loans explain these products in more detail.

Time to Pay and a tax loan compared

Cost

HMRC's late payment interest rate is published and linked to base rate. Commercial lenders price according to risk and may charge more than that, but this varies. Compare the total cost in pounds of each option over the same period, not just the headline rate.

Certainty and timing

A Time to Pay arrangement depends on HMRC agreeing. A loan depends on a lender agreeing. Either can take time, and neither is certain. If a bill is due soon, it can make sense to explore both in parallel rather than waiting for one answer.

Flexibility

HMRC sets a plan around what it judges affordable. A lender sets a fixed schedule. With a loan, the terms are in the agreement you sign, so check early settlement terms and what happens if a payment is missed.

Effect on other borrowing

A loan adds to the company's borrowing and will appear in credit checks for future applications. An HMRC debt under a payment plan may also be taken into account by future lenders, so either option can affect later applications.

Risk if things go wrong

If a company does not contact HMRC or refuses to pay, GOV.UK says HMRC may use debt collection agencies, take money from bank accounts in some cases, take goods, start court proceedings, or for business taxes, close the company. With a loan, missed payments can lead to the lender demanding repayment and calling on any personal guarantee.

Worked example

Comparing the cost

Illustrative example only: actual costs depend on the lender and your circumstances.

Imagine a company with a £30,000 VAT bill that it wants to clear over six months. Assume late payment interest of 8% a year, and a lender quoting total charges of £1,500 for a six-month loan.

Time to Pay: six monthly payments of £5,000. The balance outstanding falls from £30,000 to £5,000 over the six months, adding up to £105,000 of month-end balances. Interest is roughly £105,000 x 8% divided by 12 = £700.
Tax loan: total charges of £1,500 on top of the £30,000 borrowed.
Difference: in this example, Time to Pay costs about £800 less, if HMRC agrees to it.

The result can change if HMRC will not agree a plan, wants a shorter plan or larger payments, or if a lender's pricing is different. HMRC calculates interest daily, so the real figure will differ slightly. You can model loan repayments with our VAT loan calculator.

When each option may suit

Time to Pay may suit a company that

Has a genuine, short-term cash shortfall and a realistic plan to recover.
Can show HMRC an affordable monthly payment backed by up-to-date figures.
Has already reduced the debt as far as it reasonably can.
Prefers to avoid taking on new borrowing or giving a personal guarantee.

A tax or VAT loan may suit a company that

Wants HMRC paid in full and on time.
Needs a repayment schedule that fits its trading pattern better than HMRC will allow.
Has been asked by HMRC to explore other ways of paying before a plan is agreed.
Can comfortably afford the loan repayments alongside its other commitments.

If tax bills regularly cause pressure, it may point to a wider cash flow issue. Building a cash flow forecast can help you plan for future bills, and our guide on how to fund a VAT bill covers other options.

Practical steps if you cannot pay a tax bill

Contact HMRC early. GOV.UK says HMRC will always try to contact you if you miss a payment, and acting before then gives you more options.
Work out what you can pay now and what you can afford each month.
Prepare recent management accounts, bank statements and a short forecast.
Check whether HMRC's online payment plan service is available for your tax.
If you are considering finance, compare the total cost and terms of any loan with the likely cost of a payment plan.
Speak to your accountant, especially if other taxes are also overdue.

Business finance for limited companies, LLPs and partnerships of four or more partners is generally unregulated, and Consumer Credit Act protections generally do not apply. Read any loan agreement carefully before signing.

How Welcome Finance can help

Welcome Finance is a commercial finance broker, not a lender. We cannot set up Time to Pay with HMRC for you, and a payment plan may be the better route for some companies, so it is worth discussing both options with your accountant. If you want to explore borrowing, we can help UK limited companies, LLPs and partnerships of four or more partners compare tax and VAT finance from lenders on our panel.

Your dedicated relationship manager, a real person by phone, email and chat, stays with you from first enquiry until the funds are paid. We do not charge you a fee. We are paid a commission by the lender when your finance completes; see how we are paid. You can check your eligibility in about 60 seconds without affecting your credit score.

Frequently asked questions

Does HMRC charge interest on a Time to Pay arrangement?

Yes. Tax paid late attracts late payment interest, which HMRC sets at the Bank of England base rate plus 4%. GOV.UK explains that paying your debt more quickly means paying less in total, because you pay less interest. Penalties may also apply depending on the tax and the circumstances, so check the position with HMRC.

Can my company set up Time to Pay online?

HMRC offers an online service to check whether you are eligible and to set up a payment plan. You need the tax reference, UK bank account details, and authority to set up a Direct Debit. If the online service is not available for your situation, you will need to contact HMRC directly with details of the company's finances.

Will HMRC expect my company to borrow before agreeing Time to Pay?

It may. GOV.UK says companies must reduce the debt as much as possible before setting up a payment plan, and that directors may be asked to put in personal funds, accept lending or extend credit. HMRC may also expect assets such as stock, vehicles or shares to be released. Each case is assessed on whether the plan is realistic and affordable.

Can I use a tax loan and Time to Pay together?

Possibly. Some companies use borrowing or their own funds to pay part of a bill and agree instalments with HMRC for the rest. Whether this works depends on what HMRC accepts and what a lender offers. If you do both, include both sets of repayments in your cash flow forecast so you can be sure they are affordable together.

HMRC Time to Pay vs a tax or VAT loan: which is right for your company?