HMRC to recover small tax debts direct from bank accounts

HMRC is to be given a new power to collect smaller tax debts by taking regular, affordable deductions directly from the bank accounts of people and companies who can pay but repeatedly ignore HMRC. Budget 2026 confirmed the policy after a consultation and said it is expected to take effect from July 2029, starting with companies. For practices, the key message for clients is simple: debts that are dealt with will not reach this stage.

What was announced

The Chancellor said he was giving HMRC “stronger powers to collect overdue tax from those who can clearly afford to pay, but ignore repeated contact”. The Treasury’s overview of tax legislation says legislation will come in a future Finance Bill to let HMRC recover established lower value tax debts through regular deductions from bank accounts, where customers repeatedly fail to engage, with the changes expected to take effect from 2029-30. The Budget document dates it from July 2029.

HMRC’s factsheet sets out the design:

• it applies to established tax debts of up to £5,000 for individuals and £10,000 for companies
• it will be considered only after standard collection activity has been exhausted, after around 10 contact attempts over 9 to 12 months
• it will not apply where the customer engages with HMRC to manage the debt, including where that has already begun
• it will be introduced in phases, starting with companies and then individuals
• tailored affordability assessments will decide whether deductions are appropriate and, if so, how much and for how long

Why HMRC wants the power

HMRC says around £100 billion of tax becomes debt each year. Most of it is resolved quickly when customers engage, and larger debts are tackled through existing interventions. But more than 750,000 lower value debts, worth over £2 billion, remain uncollected each year after several collection attempts. The Budget document says the power sits alongside existing tools used to recover higher value debt. The Treasury expects it to raise £50 million in 2029-30, rising to £320 million in 2031-32.

The same Budget invests a further £70 million over five years in HMRC’s partnerships with private sector debt collection agencies, and funds 670 more compliance officers by 2029-30.

Safeguards

The consultation received 65 written responses, 34 from individuals and 31 from organisations. Respondents broadly supported action against people who persistently ignore HMRC, but stressed affordability, protection for vulnerable customers, human oversight and redress. The factsheet lists these safeguards:

• an affordability assessment for each customer before deductions begin
• customers who need extra support are removed from the process for manual review by a trained HMRC officer
• the process stops if the customer contacts HMRC to manage the debt at any point
• advance notice and a clear opportunity to contact HMRC before deductions start
• continued access to complaints, appeals and redress
• a refund-first policy where a taxpayer says a payment was taken in error, while HMRC investigates

What happens next

HMRC will work with banks and building societies, tax and debt advisers and representative bodies on the detail. That includes co-designing a Code of Practice on how the safeguards will work. A first draft of the Code and draft legislation are due for technical consultation in summer 2027. A test and learn phase will come before a phased rollout, beginning with companies.

What it means for accountants

Small debts left unanswered are now a real risk. The power targets exactly the debts that clients tend to ignore: penalties, small balancing payments and old company liabilities. Make sure clients know that responding to HMRC, or agreeing a payment plan, takes them out of scope.

Companies come first. Owner-managed companies with a stray corporation tax, PAYE or penalty balance should be reviewed, including companies that are winding down. Directors should not assume a small company debt will be written off.

Make sure HMRC can reach the client. The process turns on whether the customer engages. Out-of-date addresses, unread digital messages and unclear agent authorisations make it more likely a client looks unresponsive. Check that contact details and authorisations are current.

Use Time to Pay early. Where a client genuinely cannot pay in full, a Time to Pay arrangement shows engagement and keeps control of the repayment schedule. Our guide to what happens if you can’t pay your tax bill explains HMRC’s other enforcement options.

Respond to the 2027 consultation. The Code of Practice will set the practical safeguards, so practices that see vulnerable clients should take part when the draft is published.

For the related changes to how VAT, PAYE and Self Assessment will be paid, see Direct Debit for VAT and PAYE and payments on account reform.

Frequently asked questions

When can HMRC start taking tax debts from bank accounts under the new power?

The Budget document says from July 2029, and the overview of tax legislation says the changes are expected to take effect from 2029-30. Legislation will be in a future Finance Bill, with draft legislation and a draft Code of Practice due for consultation in summer 2027.

Which tax debts are covered?

Established tax debts of up to £5,000 for individuals and up to £10,000 for companies, where standard collection has been exhausted and the customer has repeatedly failed to engage.

Can HMRC take money without warning?

No. The design includes an affordability assessment, advance notice before deductions begin and a clear chance to contact HMRC. The process stops if the customer gets in touch to manage the debt.

How can a client avoid this?

By engaging with HMRC: paying the debt, or agreeing a payment plan such as Time to Pay. The power will not apply where a customer is engaging with HMRC to manage what they owe.