If your company can't pay wages this month, you still owe staff their pay under their contracts and under UK employment law, and you need to act fast to check whether this is a one-off cashflow gap or a sign of deeper insolvency. This guide sets out your immediate duties, short-term funding options, the risks of trading on, and what happens to staff if the company cannot recover.
Missing payroll is one of the clearest warning signs a company is in financial difficulty. Directors who understand their duties early are in a far better position to protect staff, protect themselves, and choose the right path forward.
Your immediate legal duties when a company can't pay wages
Wages are a contractual and statutory obligation, not a discretionary payment. As a director, you must:
- Tell staff honestly and promptly if payroll will be late or short, rather than staying silent until the day it fails.
- Keep accurate records of what is owed, including PAYE and National Insurance deducted but not yet paid to HMRC.
- Avoid picking and choosing which employees get paid in full while others get nothing, unless there is a clear, lawful reason.
- Consider whether continuing to trade without being able to pay staff is fair to employees and to other creditors.
Unpaid or late wages can also trigger claims to an employment tribunal, so early, honest communication with staff matters both legally and practically.
Short-term ways to fund a payroll gap
Before assuming the worst, it is worth working through practical options to close a genuine short-term gap:
- Time to Pay arrangements with HMRC — spreading VAT or PAYE liabilities can free up cash for payroll instead.
- Invoice finance or asset-based lending — releasing cash tied up in unpaid customer invoices.
- Short-term director or shareholder loans — a bridge while a bigger cashflow issue is resolved.
- Renegotiating supplier payment terms — buying a few weeks of breathing space elsewhere.
If payroll is only the latest symptom of a wider problem, it helps to step back and look at the whole picture. Our guide to a business cashflow crisis sets out how to take control of the underlying cash position, not just this month's wage bill.
The risk of trading while insolvent
A company that cannot pay its debts as they fall due, including wages, may be cash-flow insolvent under the Insolvency Act 1986. Continuing to trade and take on further credit while insolvent, with no reasonable prospect of avoiding insolvent liquidation, can expose directors to a wrongful trading claim under section 214 of the Insolvency Act 1986.
Wrongful trading can lead to a director being ordered to personally contribute to the company's debts. It does not require dishonesty — simply continuing to trade when you knew, or ought to have known, insolvency could not reasonably be avoided is enough. This is a key reason directors weigh up carefully who to pay first when a struggling company cannot meet every obligation, including HMRC and suppliers, alongside wages.
What employees are entitled to if the company fails
If a company becomes insolvent and cannot pay outstanding wages, employees are not left with nothing. The National Insurance Fund can cover certain debts owed to staff, including:
- Up to eight weeks of unpaid wages, subject to a statutory weekly cap.
- Statutory notice pay.
- Unpaid holiday pay built up in the previous 12 months.
- Statutory redundancy pay, where applicable.
These payments are made through the Insolvency Service once an insolvency practitioner has been appointed. Full detail on eligibility and how to claim is set out in the government's guidance on your rights if your employer is insolvent.
How redundancy and the Redundancy Payments Service work
Where a company closes and jobs are lost, employees with at least two years' continuous service are usually entitled to statutory redundancy pay. If the employer cannot pay this directly, staff can claim it from the Redundancy Payments Service, which sits within the Insolvency Service.
- Claims are normally made online once the appointed insolvency practitioner has confirmed employment details.
- Payment amounts depend on age, length of service and weekly pay, up to a statutory cap.
- The insolvency practitioner handling the case usually guides employees through the claim, reducing the burden on directors.
You can find current caps and the claims process on gov.uk's page on how to claim redundancy pay.
Deciding between rescue and closure
Not being able to pay wages this month does not automatically mean the company must close. The right path depends on whether the underlying business is viable and whether the payroll gap is temporary or structural.
Broadly, directors are weighing up:
- Rescue — restructuring debts, renegotiating terms, or a formal arrangement that lets the business keep trading and keep staff employed.
- Managed closure — an orderly liquidation that deals fairly with staff claims, HMRC and other creditors, and limits director risk.
This decision is easier once you understand the full scale of what the company owes and to whom. Our article on what to do when a company owes more than it can pay walks through that assessment in more detail.
Frequently asked questions
Can I pay myself before staff wages are settled?
As a director, paying yourself ahead of staff when the company cannot meet payroll is risky and can be challenged later as a preference or breach of duty. It is generally safer to treat director pay in line with, not ahead of, employee wages during a shortfall.
Can I pay staff a partial wage instead of nothing?
Partial payment is often better than none, provided it is applied fairly and explained clearly to staff. It does not remove the shortfall, but it can reduce hardship while you resolve the underlying cashflow problem or take specialist advice.
What happens to PAYE if I delay it to cover wages?
Delaying PAYE to fund payroll leaves a growing debt to HMRC that must eventually be paid or formally addressed, for example through a Time to Pay arrangement. HMRC's deadlines and employer obligations are set out on its PAYE for employers guidance.
Do I still have to pay into workplace pensions if wages are short?
Yes. Pension contributions are a separate statutory obligation from wages and missing them can bring additional regulatory consequences. If cashflow cannot stretch to cover pensions alongside pay, this is a strong sign the issue goes beyond a single missed payroll.
Could this situation lead to a winding-up petition?
If unpaid wages or related debts, such as PAYE, go unresolved, HMRC or another creditor could ultimately petition to wind up the company. Understanding your options early reduces the chance of matters reaching that point unprepared.
This article is general information, not legal, financial or insolvency advice, and does not cover every director's circumstances.
If you're weighing up your options while a company can't pay wages, Harbourfirst can introduce you to a regulated insolvency practitioner or solicitor to talk it through — start an enquiry.