Consultation on proposed changes to the PAYE system

Further to the announcement in the June 2010 Budget, HMRC has opened a consultation regarding some far reaching changes to the current PAYE system.

The first proposal is to use “Real Time Information”, which would involve employers providing details to HMRC on pay and deductions every time an employee is paid instead of just reporting at the end of the tax year. The idea is to enable HMRC to issue a tax code to ensure that the employee pays the correct amount of tax/NIC throughout the year without the need to make significant adjustments after the tax year has ended. It is envisaged that the employer would benefit by removing the need for employers to have to complete forms P45 and P46 for starters/leavers and it will also simplify the year end reporting process.

Secondly, building on the concept of Real Time Information, an even more radical proposal being considered in the longer term is to move to a system of “Centralised Deductions”. Under this proposal it would be HMRC rather than the employer who would be responsible for calculating PAYE, National Insurance and Student Loan Deductions, although the employer would still be required to calculate gross pay and any other third party deductions. Under this proposal there would be no need to use tax codes.

This is a very brief summary of the proposed changes and there is a lot of detail involved with these proposals. Full details are included in the attached document from HMRC. The deadline for responding to the consultation is 23rd September 2010.

If you have any queries or comments please contact John Harling on 07768 446381