The future of PAYE: How the 66-year-old tax system is changing

Summary:Real-time information could spell the end of troublesome year-end tax reckonings

Real-time information could spell the end of troublesome year-end tax reckonings

The grind of the year-end tax reckoning looks set to be consigned to the dustbin of history under a proposed overhaul of pay-as-you-earn (PAYE) - a revamp the taxman reckons will ease the burden of administering payroll and save UK employers hundreds of millions of pounds a year to boot.

According to HM Revenue & Customs, some 40 million people are currently taxed via PAYE, and it calculates the operating costs for private sector employers and pension providers of PAYE now stand at £0.7bn per year.

The UK's system for income tax filing, which began operating during the Second World War, requires employers to calculate and deduct tax and National Insurance contributions from employees' wages on behalf of HMRC - typically sending the resulting deductions to HMRC once per year.

Beancounting: HMRC is consulting on changes to PAYE that could make it easier to calculate tax deductions

HMRC is consulting on changes to PAYE that could make it easier for employers to calculate tax deductions
(Photo credit: ansik via under the following Creative Commons licence)

HMRC is now planning to update the process, which still involves year-end tax reckonings and paper forms such as the P45, with the introduction of a modern software system called Real Time Information (RTI).

Keeping pace with the changing workforce
Although HMRC says the vast majority of individuals are still taxed correctly via PAYE, it admits the current system has failed to keep pace with the UK's changing workforce where concurrent employments, frequent job moves, multiple income sources and diverse taxable benefits are increasingly common - a workforce that RTI is aimed at better accomodating.

Under RTI, the finance department will send payment data to HMRC every time an employee is paid rather than once a year. While the introduction of RTI will see payment data be sent to HMRC more frequently than under PAYE, the trade-off will be worth it, according to HMRC: it calculates employers' PAYE admin costs will be reduced by an estimated £360m per year.

"[RTI] will collect information from employers about the deductions they make under PAYE at the time at which they pay their employees," an HMRC consultation document (PDF) published earlier this month says. "Obtaining this information at the time payment is made, instead of annually, will allow improvements to be made to PAYE, reducing the administrative costs of PAYE for employers and HMRC.

"It will enable reductions in fraud, error and overpayments in the current benefits and tax credits system. It will also increase the number of individuals who are taxed correctly through PAYE."

Full details of how RTI will work in practice are...

Topics: Tech Industry

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