Introduction »

Let’s go Real Time - the future of PAYE

In July 2010 HMRC issued a Consultation Document looking at major reforms of the PAYE system using real time information. You may have read or heard about elements of the system but we thought that we would try to dispel a few myths.

The project consists of two separate elements:

• Real Time Information (RTI) would collect information about tax and other deductions automatically each time employers ran their payroll. This information would be submitted automatically to HMRC at the same time employees were paid.
• Centralised Deductions (CD) would build on RTI by moving the responsibility for calculating and deducting tax, national insurance and student loan repayments from employers to the electronic payment system.

It appears that the Government have decided to proceed with a phased introduction of RTI with a pilot beginning in 2012 and then implementation from April 2013. It also appears that CD will only be considered once RTI has been fully introduced and this seems unlikely before 2015.

RTI

With RTI, employers paying employees electronically would send HMRC details of employees’ pay, the deductions of tax, NIC and student loan repayments and information about employees’ identities.

The information would be produced automatically by the payroll system at the point of making the payment and would be sent to HMRC via the electronic payments system as part of the payment instructions.

HMRC think that this could simplify the processes when people change jobs, with no need to complete a P45/46 but with a notification through the new electronic system. Individuals changing jobs in the year would be more likely to pay the right amount of tax. It could also do away with end of year information. Access to real time data would also improve the benefits and tax credits system, with better administration and reductions in fraud, error and overpayment.

The basic process would be:

• most employers would be required by regulation to use the Bacs system to transmit RTI information with payment instructions;
• a common standard will be used for the transmission of RTI data at all stages of the payments infrastructure from payroll software through banking interfaces and Bacs submission software to the Bacs system itself;
• smaller employers (fewer than 50 employees) who do not pay their employees via Bacs will initially be able to submit RTI from their software, or via an agent, using an internet channel through the Government Gateway.

Employers would still need to issue payslips to their employees and issue P60s at the year end.

CD

The basic concept is that HMRC would construct a central calculator to work out the correct deductions of tax, national insurance and student loan repayments from an individual’s pay. The employer would send the gross payment through the electronic payment system to the central calculator where the deductions calculated by HMRC would be made automatically. The resulting net payment would then be sent to the individual’s bank account and the deductions would be paid directly to the government.

As employers would no longer be responsible for the tax, they would not need to operate tax codes.

Obviously, things are in their infancy and there will be a lot more information to come in future months. We will keep you fully informed of developments.

Introduction »