• a provable debt, which means it becomes part of HMRC’s pre-insolvency claim against an insolvent entity
• an expense of the insolvency for insolvency practitioners

When an employer enters a formal insolvency procedure, you as the appointed insolvency practitioner (‘office holder’) may pay employees for services the employee has rendered to the employer during both the pre and post appointment period.

You must pay all Income Tax and National Insurance contributions due on any pay issued to employees after the date of your appointment as an expense of the insolvency.

All the Income Tax and National Insurance contributions due at the time of payment should be included in a return and paid to HMRC by the employer who made them.

You can read more information about:

When you are appointed, you become responsible for:

• making decisions about whether to retain staff or make redundancies
• setting up any new PAYE schemes
• maintaining current PAYE schemes, if needed
• dealing with employee proofs of debt and distributions
• submitting Real Time Information returns

24.2.1 If the insolvent company is sold on

If employees transfer to a new employer who incorrectly uses the PAYE reference of the employer you are appointed over, HMRC cannot remove or amend those filings. It is important you make sure any new employer is aware the previous scheme should not be used, for example where an administration pre-pack sale occurs.

When you assume control of the business, you will need to decide whether to keep the current workforce or make staff redundant.

If a company is being liquidated, all employment automatically ceases. There are some exceptional circumstances where certain staff may be kept to assist with the winding up of the business.

If you decide to keep staff, you will be liable for PAYE for these employees. Any unpaid PAYE liabilities for employees who were made redundant on the date of insolvency will form part of the employees’ claim in the insolvency. You will also need to consider the following for any staff you keep:

You should continue to use the insolvent employer’s existing PAYE scheme for any ongoing salary payments to current or retained employees.

24.3.1 If you decide to make staff redundant

Payments or distributions made to employees who are not retained after the insolvency date must be processed through an Employment Protection Act (EPA) scheme. You can read more about Employment Protection Act schemes in section 24.5.1.

RTI requires employers to send data in real time about tax, National Insurance and other deductions at the time that the salary or earnings are paid. 

If you continue to employ staff, you need to submit RTI returns to HMRC. If the employer was registered for PAYE, you can use the existing PAYE scheme. If the employer was not registered for PAYE, you will need to register the employer for PAYE. 

There are two main types of RTI return:

• Full Payment Submission (FPS) — you need to submit an FPS each time you pay an employee, whether this is weekly, 4-weekly or monthly
• Employer Payment Summary (EPS) — you can use this return to: 
  • reclaim statutory payments from HMRC (for example, maternity pay) 
  • reclaim Construction Industry Scheme deductions 

You can read more information about running payroll.

Employees are often creditors of insolvent entities and are entitled to receive a distribution of the insolvent’s assets along with other creditors. Distributions to employees are typically: 

• pay in lieu of notice 

These distributions are considered as a ‘relevant payment’ under the Income Tax (PAYE) Regulations 2003, and so are subject to tax and National Insurance contributions deductions. This means, you must set up a new PAYE scheme when you are ready to pay a first distribution to creditors. When you have paid the final distribution, you must send a final FPS to HMRC.

24.5.1 How to set up an Employment Protection Act scheme 

Contact Employers: general enquiries by phone.

Tell the adviser you need to set up an Employment Protection Act scheme. 

They will ask you for the following information:

• the name and National Insurance number of directors (if available)
• any other correspondence addresses you would like to use (if needed)
• date of the first pay day — this is the date of the first dividend payment
• Enforcement and Insolvency Service (EIS) reference number

If the insolvent entity is a sole trader or a partnership, you need to provide the National Insurance number of the sole trader or partners.

The adviser will then ask some more questions and tell you what you’ll receive and when.

Once the Employment Protection Act scheme is set up, read PAYE and payroll for employers for guidance on operating PAYE.

24.5.2 Making additional payments

If you need to make additional payments (including any dividends) after the final FPS has been submitted, you should attempt to submit a new FPS,. If you are unable to do so contact Employers: general enquiries by phone and they can arrange for the scheme to be re-started.

This can only be done either in:

• the same tax year as the date of cessation or cancellation
• the next tax year after the date of cessation or cancellation

For any other year, a further scheme will need to be set up.

24.5.3 Allocation of payments 

We sometimes receive payments of tax and National Insurance contributions due on dividends to employees where an Employment Protection Act PAYE scheme has not been set up. This means we’re unable to allocate the payments and update the employee’s PAYE tax and National Insurance contribution records.

If you set up an Employment Protection Act scheme you must submit an FPS. Failure to do so means we’ll be unable to allocate the payments and update the employee’s PAYE tax and National Insurance contribution records. We cannot accept this information by letter.

For guidance on this process read PAYE and payroll for employers.

A benefit is provided when it “becomes available to be enjoyed by the employee”. 

Details of benefits are provided to HMRC through form P11D and can result in a liability on the employer for Class 1A National Insurance contributions. 

This means that you might need to submit a P11D in which benefits were provided both pre- and post-insolvency. In these cases:

• HMRC will submit a proof of debt for any Class 1A National Insurance contributions that arose before the date of insolvency 
• any Class 1A National Insurance contributions that arose post-insolvency are an expense of the insolvency

If employees have any taxable expenses and benefits that need to be reported to HMRC, you need to send in paper versions of P11D or P11D(b) forms. You can also send in your own formatted version that meets HMRC’s standards.

Read more information about how to:

Employment Allowance (EA) allows eligible employers to reduce their annual National Insurance liability.

Employers can claim at any time in the current tax year. They can also claim for the closed tax years up to four years prior to the current tax year provided they have not already claimed for those years.

24.7.1 Companies in administration

If a company is in administration and continues to trade and employ staff, you are entitled to claim Employment Allowance in the same way as any other employer.

24.7.2 Companies in liquidation

In liquidation all employment ceases automatically so you must submit an Employer Payment Summary (EPS) to show that the company is no longer eligible for the Employment Allowance. 

24.7.3 Sole traders and partnerships

Where Class 1 National Insurance arises and the business continues to employ staff, you can claim Employment Allowance. 

If employment ceases, you must notify HMRC that the eligibility to Employment Allowance has ceased.

24.7.4 HMRC claims in insolvency proceedings

Any incorrectly claimed Employment Allowance should be included in HMRC’s proof of debt. We may include penalties and interest for any underpaid amounts of PAYE. 

This may include late payment interest and late payment penalties, as the invalid claim meant that the discharged tax or National Insurance liabilities were not paid on time. 

If the invalid claim is submitted post-insolvency, you will have to pay this as an expense of the insolvency. 

You can read more information about what happens when a claim is incorrectly awarded in National Insurance Manual NIM06645.

In a PAYE period that straddles the date of insolvency, any Apprenticeship Levy should be paid in full as an expense of the insolvency.

Any overpayments of the levy would be refunded as a PAYE credit. 

24.8.1 Apprenticeship Levy Allowance

Contractors should register for the Construction Industry Scheme (CIS) and make deductions from payments to subcontractors, dependent on the status of the subcontractor. All payments made under the scheme to HMRC should be reported on a CIS300 return.

Subcontractor’s Income Tax and National Insurance contributions are reported in their Self Assessment tax return.  

24.9.1 Insolvency of the contractor

If you are acting as an insolvency practitioner for a contractor, you should file all CIS returns for any period where the business trades post-insolvency.

24.10.1 If an individual is made bankrupt in England, Wales or Northern Ireland

HMRC’s direct tax claim in the bankruptcy is made up of all direct taxes that arise during the tax year 6 April to 5 April of the year the individual was made bankrupt.

For example, if an individual was made bankrupt on 10 May 2026, then HMRC’s claim would include the tax due on income during the period 6 April 2026 to 5 April 2027. In this case, HMRC will issue a nil tax (NT) code for the remainder of the tax year (10 May 2026 to 5 April 2027) where the bankrupt individual is in PAYE employment. This means no PAYE will be deducted for that period.

If the bankrupt individual agrees to a voluntary arrangement as a means of exiting bankruptcy, then we will:

• withdraw the NT code for PAYE if it has been applied
• issue a normal tax code on a week 1 or month 1 basis

The underpayment for any tax not paid during the NT code period is then owed to HMRC as a provable debt.

24.10.2 If an individual is made bankrupt in Scotland

In Scottish sequestration or trust deed cases, code NT is not applied where an individual is declared bankrupt regardless of whether they work for an employer in another nation in the UK or not. This is because the rules differ between Scotland and the rest of the UK.

If you have any further queries about this guidance, you can contact R3 through their website or your representative body.