Which creditors should I pay first when cash flow is tight?

UK directors should generally prioritise: 1) employee wages and statutory payments owed for work done, 2) secured lenders with fixed charges who can seize assets, 3) HMRC preferential taxes (VAT, PAYE, employee NIC, CIS deductions), 4) other preferential debts like pension contributions, 5) creditors holding personal guarantees, 6) floating-charge holders, 7) HMRC non-preferential debts like Corporation Tax, then 8) ordinary unsecured trade creditors. Paying in this order mirrors how a liquidator would pay and protects you from wrongful-trading exposure. Always take tailored professional advice before major payment decisions.

Does HMRC have priority over other creditors?

Yes, in part. Since 1 December 2020 HMRC is a preferential creditor for VAT, PAYE, employee National Insurance and Construction Industry Scheme deductions owed at the time of insolvency. This Crown preference ranks HMRC ahead of ordinary unsecured creditors and behind only fixed-charge holders and other secured parties. HMRC can also act aggressively, presenting statutory demands and winding-up petitions, so tax arrears should never be silently ignored.

Can a director be personally liable for company debts?

Ordinarily no, because of limited liability. But directors can become personally liable through signed personal guarantees, and through director duties such as wrongful trading, misfeasance and certain tax provisions like PAYE Security Deposits or Personal Liability Notices. Prioritising payments in the order a liquidator would pay — and documenting decisions in board minutes — is the strongest defence.

What happens if I ignore a statutory demand?

A statutory demand gives you 21 days to pay or reach an arrangement. Ignoring it allows the creditor to present a winding-up petition to the court, which can lead to compulsory liquidation. Act immediately: challenge the demand if the debt is genuinely disputed, use the time to negotiate a payment plan, or consider a formal rescue such as a Company Voluntary Arrangement (CVA) before the clock runs out.

CASH-FLOW CRISIS — SEPTEMBER 2026

Which Creditors to Pay First When Cash Is Short

Get the payment-priority order wrong and you risk winding-up petitions, personal liability and wrongful-trading claims. Get it right and you buy your business the time and goodwill it needs to survive. This is the director's plain-English guide.

UK business director under financial stress at a desk reviewing bills and invoices, deciding which creditors to pay first

CASH-FLOW TRIAGE JUST PUBLISHED — SEPTEMBER 2026

Creditor Priority, HMRC & Director Protection

Creditor Payment Priority Order: The Bills Directors Must Settle First

When cash runs short — and it does for most UK directors at some point — you still have to choose which bills get paid. Paying the wrong ones first can expose you to winding-up petitions, HMRC enforcement, personal-guarantee calls and even wrongful-trading claims. This honest, plain-English guide walks you through the exact order UK directors should prioritise payments: from employee wages and VAT, to secured lenders, HMRC's Crown preference and unsecured trade creditors. You'll learn the real-world difference between legally-protected debts and the ones where you still have room to negotiate, how suppliers' behaviour signals which debts to treat as urgent, why ignoring HMRC is nearly always a mistake, and the 13-week cash-flow forecast that turns guesswork into a plan. Crucially, we show you when a debt can't be paid in full and how to go about a Company Voluntary Arrangement, a negotiated payment plan, or — where rescue genuinely isn't possible — an orderly creditors' voluntary liquidation that protects you personally.

Creditor Priority HMRC Crown Preference Preferential Debts Employee Wages Secured Lenders Wrongful Trading

14 min read Read the Guide

When money runs short, every UK director faces the same uncomfortable question: which creditors do I pay first? There is no neutral answer — every payment, and every delay, shapes what happens next. Pay the wrong debt and you can trigger a winding-up petition. Ignore the right one and you can lose your home under a personal guarantee. Get it hopelessly wrong and you can be accused of trading while insolvent.

This guide gives you a clear, practical order of priority to follow. But first, three truths you need to face head-on.

Truth 1: You can't pay everyone — and that's a legal problem, not just a money problem

The moment your company is unable to pay debts as they fall due, you are, by definition, cash-flow insolvent. From that point on, continuing to trade could expose you to a wrongful-trading claim if you can't show you were acting in the best interests of creditors. This is why the order you pay things matters so much — it is part of your evidence that you acted responsibly.

Truth 2: HMRC is not like other creditors anymore

Since 1 December 2020, HMRC became a preferential creditor for VAT, PAYE, employee NIC and Construction Industry Scheme deductions owed at the time of insolvency. That means HMRC now sits ahead of ordinary unsecured creditors — and behind only fixed-charge holders and secured parties. Add HMRC's sharply increased appetite for enforcement action in 2026 and you can see why tax arrears need urgent, proactive handling, not silent delaying.

Truth 3: Some debts follow you personally

If you've signed a personal guarantee — for a loan, an overdraft, or a commercial lease — that debt doesn't die with the company. Understanding which of your creditors hold this personal leverage completely changes your priority list, because the true cost of default is not just the business's money, but your own.

The Director's Payment Priority Order at a Glance

Use this as your working list when cash is tight. It reflects how a court or liquidator would look at your conduct, combined with which creditors hold the most immediate power to harm you or enforce against you personally.

Employees — wages, holiday pay and statutory payments owed for work already done.
Secured lenders (fixed-charge holders) — they can seize the asset or appoint a receiver.
HMRC preferential taxes — VAT, PAYE, employees' NIC and CIS deductions.
Other preferential debts — such as unpaid pension contributions.
Creditors with personal guarantees — the ones who can come after you personally.
Floating-charge holders — the bank or lender over your general assets.
HMRC non-preferential debts — Corporation Tax and any VAT/PAYE owed after the point of insolvency.
Ordinary unsecured trade creditors — suppliers and service providers.
Shareholders and connected parties — usually the very last to be paid (and watch overdrawn director loan accounts).

This order reflects statute and the reality of enforcement power. It is guidance, not legal advice — and it is vital you take tailored professional advice before making major payment decisions.

Why the Priority Order Is a Legal Judgement of You

If your company does eventually enter insolvency — voluntarily or not — a licensed insolvency practitioner or official receiver will look back at how you prioritised payments while the company was still trading. This is the single most misunderstood part of the whole exercise. Paying a friend or a connected company ahead of HMRC or employees is a red flag that can support a misfeasance claim or an accusation of wrongful trading. Preferring one ordinary creditor over another in the final weeks may itself be regarded as a preference.

The safest approach is simple: pay in the order a liquidator would pay — and document every decision in your board minutes. A paper trail showing "we chose X because of [rationale] and on [date]" is your strongest defence. If you need to go deeper on the legal exposure side, our guide to directors' legal responsibilities during financial distress is essential reading.

1. Employees come first — always

Wages for work already done are preferential. Paying your staff on time isn't just the right thing to do — it also protects you from tribunal claims and keeps goodwill. Unpaid statutory holiday pay and pension contributions also rank highly. Treat payroll as non-negotiable.

2. Secured lenders can act fast

A fixed-charge holder (usually a bank over a specific asset) can appoint a receiver or seize the asset without going to court. If a secured creditor turns hostile, you can lose trading-critical assets overnight. Keep them informed and, where possible, paid.

3. HMRC's Crown preference is real

VAT, PAYE and employee NIC are now preferential. Worse, HMRC holds powerful enforcement tools and is using them far more aggressively in 2026 — from statutory demands to winding-up petitions. Always engage with HMRC before they engage enforcement.

4. Personal-guarantee creditors can hit you personally

A landlord or lender who holds your personal guarantee can pursue your home once the company defaults. Prioritise these where you can — and if one is called in, act quickly. Our personal guarantee survival guide covers negotiation and asset-protection options.

When You Genuinely Can't Pay: Your Best Moves

There's a world of difference between "cash is tight today" and "we cannot meet our debts." Here is how to behave in each — and how to stay on the right side of the law while you work it out.

Engage, don't hide

Almost every escalation — a statutory demand, a winding-up petition, a HMRC notice of enforcement — happens because a creditor felt ignored. A proactive phone call, a realistic proposal and a little honesty defuse most situations. If you receive a statutory demand, act immediately; the 21-day window is short.

Negotiate a plan

For HMRC, a properly prepared Time to Pay arrangement can spread tax debt into affordable instalments. For trade suppliers, a formal extension or staged payment beats a broken promise. The stronger your evidence, the better your terms — which is exactly why the forecast below is so important.

Consider a formal rescue

Where debts have built up to an unmanageable level but the underlying business is sound, a Company Voluntary Arrangement (CVA) can restructure what you owe while you keep trading. If the business is genuinely finished, an orderly creditors' voluntary liquidation protects you from the messy, asset-stripping alternative.

The One Tool That Fixes Most of This: A 13-Week Cash Flow Forecast

You cannot prioritise creditors you can't see coming. A 13-week cash flow forecast maps every expected receipt and payment for the next quarter — the money going out to HMRC, suppliers, wages and lenders against the money coming in. It turns "I hope we survive" into a concrete, week-by-week plan, and it is the single strongest document you can show an HMRC officer or a lender when you ask for time.

We've built a free, interactive 13-week cash flow forecast template you can start using today. And if you want to understand the broader early-warning picture around your business, take the split-second business crisis assessment to see exactly where you stand.

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Your Questions, Answered

Should I pay HMRC or my suppliers first?

Can I be personally liable for the company's debts?

What if a creditor sends a statutory demand?

Is a CVA a good way to restructure my debts?

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Directors: Safeguard Your Personal Assets