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info@commonwealthcontractors.comEarlier in the year the Coalition Government conducted a consultation into radical plans to modernise the Pay as You Earn (PAYE) scheme and save substantial amounts in annual operation costs. The PAYE scheme currently costs the Government £1 Billion per year to administer however the new Government does not believe that this represents good value for money. Therefore a Real-Time Information System will be set up to improve information transfer and if successful implement a radical Centralised Deduction System at some time in the future.
Reasons to Modernise the Pay as You Earn Scheme
The Pay as You Earn Scheme was introduced back in 1944 however much has changed in the UK labour market since then. Back in the 40s and 50s most employers ran a weekly payroll rather than a monthly payroll and made payments in cash rather than via an electronic payment system. When people left an employment an employer would quickly make payment and issue a P45 so that the worker could take the document to their next employment and keep everything in order. Today most employers make monthly payments and use an electronic record system meaning that it often takes a while for leaving employees to receive their P45. Often this means the new employer will use a P46 and consequentially a temporary tax code.
The complexity of the workforce has also increased substantially over the years with many workers receiving multiple sources of income today. The drive to a temporary workforce has driven this change. People in these situations may require several tax codes so it is harder to ensure the correct amounts of tax are deducted from each payment.
Overall the Government is looking to modernise the system in order to:
- Reduce the private sector cost of administering the system (the Government estimates UK businesses spend a combined £0.7 Billion each year running PAYE)
- Reduce the public sector cost of running the PAYE scheme. The HM Revenue & Customs spends around £1 Billion on PAYE each year
- Improve tax deduction accuracy and reduce the need for repayments (at present around five million people receive a repayment each year)
- Improve the efficiency with which student loan repayments are collected
National Insurance and PAYE Computer Service (NPS)
The HM Revenue & Customs now have a new National Insurance and PAYE Computer Service (NPS) up and running which is expected to significantly improve certain aspects of the PAYE scheme by creating a single tax account for each employee and pensioner. The record will include details of each persons:
- Employment History
- Historic Earnings
- National Insurance Record
Previously, the HMRC system held details at employer level, so if an individual had more than one job, the record for each would be held separately. Details were not brought together until all the sources of an individual’s income were consolidated at the year end. The new service provides a joined up view of an individual’s employment and pension income and a complete contact history in which all information about an individual’s contact with HMRC is attached to their tax account.
Step 1: Real Time Information
In the consultation document the Government proposed a two step solution to improve the PAYE scheme, step one being a Real Time Information system and step two a radical Centralised Deductions system.
Under the Real Time Information System employers paying electronically would send the HM Revenue & Customs details of an employees gross pay, income tax, national insurance and student loan deductions along with details of an employees identity. This information would be passed to the HMRC at the point that payment is made to the employee. The HMRC believe that such as system would:
- Simplify the P45 / P46 procedure for people leaving the employment of one company and joining another
- Reduce end of year workload for employers and the HMRC
- Streamline the administration of the current system
- Reduce fraud, errors and overpayments
Under the real time system employers would still remain responsible for the calculation and deduction of Income Tax, National Insurance Contributions and Student Loan Repayments.
Step 2: Centralised Deductions
Centralised Deductions represents a radical proposal to modernise the system, however it could only be implemented if the Real Time Information system ran efficiently.
Under the proposals the responsibility for calculating deductions under Pay as You Earn would move from the employer to the HM Revenue and Customs with employers sending the gross payment to the HMRC and the HMRC using a central calculator to calculate the deductions and then make payment to the worker minus the correct tax deduction. The HMRC would at the same time send the tax deduction directly to the Treasury.
The big benefit of this system would be the ability to do away with tax codes meaning a significant reduction in administration for the HMRC and UK employers. Information about deductions would not however appear on an employer generated payslip, instead individuals would be given access to their consolidated tax account which would show how the deductions had been calculated by the HMRC
The big issue with this system of course is the HMRC’s ability to administer the system without issue. At present it is difficult to deal with the HMRC and they do not have the best record in dealing with IT implementations.
Commonwealth Contractors
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