HMRC consults on proposals to improve operation of PAYETuesday, August 3rd, 2010
The Coalition’s June 2010 Budget announced that the Government wished to explore how the Pay As You Earn (PAYE) system could be improved in order to reduce costs, ensure accurate tax calculations, and make it easier for employers and HMRC to administer.
As the first step in this process, HMRC published a discussion document on 27 July, entitled Improving the operation of Pay As You Earn (PAYE). The document explores options for moving to a system that collects information on PAYE deductions at the time employees are paid instead of at the tax year end. The process is called “Real-time Information”.
A longer-term enhancement could see HMRC taking the process further and actually handling the tax and NICs calculations centrally. This process is called “Centralised Deductions”.
The following is a summary of the proposals. They are of considerable interest to everyone working in payroll and HMRC is inviting comments from anyone with a contribution to make. Readers who would like to express their views on the proposals or make alternative suggestions should study the full document carefully. It can be downloaded from the link below. Full instructions for sending comments are included in the document and the deadline for responses is 23 September 2010.
Problems with PAYE
The PAYE process was introduced in 1944 and the concept has changed little since then. In tax year 2009/10 it brought in £249 billion in tax and NICs and £1.1 billion in student loan repayments. It cost HMRC less than a penny for each pound of tax collected.
PAYE continues to work well for employees with regular, stable earnings but can result in overpayment or underpayment of tax in the case of employees with more than one job, or with a pension and a job. Each year around 5 million people have to claim a tax repayment or receive a tax bill because PAYE has not collected the correct amount of tax. Student loan deductions can continue to be deducted after the loan has been repaid in full. When employees have more than one job, they can overpay NICs and have to claim a repayment.
Some of the reasons for these problems are:
- checks that correct deductions (tax, NICs, student loan deductions) have been made can only be done after the end of the tax year
- adjustments to tax codes during the year are based on estimated income
- monthly pay and computerisation mean that a P45 may not be issued until some time after an employee leaves, preventing the new employer from making correct deductions
- the need for individuals to have more than one tax code to manage multiple sources of income, including pension payments while still in employment.
Technology has developed so that most employers use some form of computerised payroll and can make payments and exchange information almost instantly. These developments, and the recent improvements to HMRC’s own systems, are the basis for these new proposals for improving the PAYE process.
This initial proposal makes use of the automatic deduction calculations carried out by computerised payroll systems and the ability of most employers to pay their employees electronically.
The “Real-time Information” concept would involve the automatic submission of each employee’s pay and deductions each time the employee is paid electronically. The information would be held by HMRC in a consolidated real-time tax account for each person. For those employers not paying electronically, the annual Employer CD-ROM could be enhanced to submit the information at the time of payment. The changes would require enhancements to payroll software but could, in HMRC’s estimation, be in place by April 2012.
Some of the benefits of Real-time Information, as detailed by HMRC, include:
- simplify the process for both employers and HMRC by removing or reducing the use of P45s and P46s, as HMRC could detect when a new employee is paid for the first time and then issue the correct tax code
- employee’s changing jobs during the tax year would be more likely to pay the correct tax, reducing the need for end-of-year adjustments
- if pay and deduction information is submitted throughout the tax year, the year-end reporting requirement would be considerably reduced
- real-time income information would help HMRC pay tax credits and DWP pay income-related benefits more accurately
- HMRC would know, at any time, exactly how much tax and NICs are due to be paid over by employers.
First of all, HMRC has endeavoured to make it clear what “Centralised Deductions” isn’t.
“Despite what you might have read already, we want to reassure everyone in the business of payroll that we are not looking for centralised payroll. Whatever happens, making up to gross and determining tax etc liability will remain the domain of payroll and the need for payroll professionalism and professionals will continue.”
The “Centralised Deductions” proposal, therefore, is a longer-term (not before April 2015) concept, building on “Real-time Information”. HMRC sees it as one way of ensuring “correct PAYE calculations in almost all situations” but is “interested in hearing views on any other ways in which a similar outcome could be achieved”.
Once employers are routinely sending pay and deductions information, the next step would be for each employee’s gross payment figure to be sent to HMRC for each payday and for the tax, NICs and other deductions to be calculated centrally. Individuals’ real-time tax accounts would be expanded to include their personal tax allowances and other reliefs. HMRC would also develop a central calculator to work out the correct tax, NICs and student loan repayments from their pay. The make-up to gross would still be the employer’s responsibility but the gross-to-net calculations would be carried out by HMRC. The resulting net pay figures would then be sent into the banking system for employees’ accounts to be credited and the total deductions figures debited from the employers’ accounts.
HMRC’s suggested additional benefits from “Centralised Deductions” include:
- there would no longer be a need for tax codes as the employer would not be involved in the tax calculations – the actual annual allowances and reliefs would be used
- HMRC would be responsible for the accuracy of the calculations and perhaps provide employees with direct access to their consolidated tax account – employer-produced payslips would not show deduction information
- individuals completing self-assessment returns could be provided with pre-populated forms showing their employment and pension payments and deductions
- employees would consult their employers with questions about amounts and timing of gross payments, statutory payments and third party deductions, but questions about tax and NICs deductions would be the responsibility of HMRC.
The suggested effect on employers is that they would no longer have to:
- receive information about individuals, calculate and make deductions from payments to them
- operate tax codes on 55 million employments
- make monthly payments of deductions to HMRC
- process forms for people starting or leaving work
- reconcile payments across the year and make annual returns to HMRC
- provide employees with an end-of-year P60.
Employers would still be responsible for:
- determining the pay components that are subject to tax and NICs
- determining taxable expenses and payments
- some statutory payments (e.g. SSP)
- third party deductions (e.g. trade union subscriptions).
Payroll system developers and payroll bureaux would be significantly affected, with much less processing to do but, as suggested by HMRC, “a greater emphasis on providing advice and guidance”.
The discussion document also considers questions relating to data management and security. A list of the data items that would need to be submitted by employers to HMRC in order to operate “Real-Time Information” and “Centralised Deductions” is provided.
The final paragraph of the document appears to postpone indefinitely an earlier HMRC initiative – the payrolling of benefits-in-kind.
“This document assumes that Benefits in Kind would continue to be returned annually in arrears using form P11d as now. HMRC would be interested in hearing suggestions for simplification of the benefits in kind process using real time information.”
Discussion document on improving the operation of Pay As You Earn (PAYE)