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HM Revenue & Customs has launched a consultation on how to improve the PAYE System.

Introduction

HM Revenue & Customs (HMRC) wants to hear your views on how the Pay As You Earn (PAYE) system can be improved to make it more efficient for millions of taxpayers. 

Real-Time Reporting and Centralised Deductions

In particular, HMRC is looking at how more frequent or “real-time” PAYE information could support the tax and welfare system.

Exchequer Secretary David Gauke said:

“The PAYE system needs to respond better to the circumstances of the individual taxpayer because only in this way will we be able to reduce errors and provide taxpayers with the clearest picture possible of their tax and allowances. We also need a PAYE system that reduces the burden on employers.

“We would like to hear from all who have views on how a real-time system could best meet their needs to ensure that we deliver a 21st century PAYE system.”

The Discussion Document on Improving the Operation of Pay As You Earn (PAYE) describes the options for real-time information and a longer-term one of “centralised deductions”, which could move tax calculation away from employers altogether.

Real-Time Reporting

HMRC believes this real-time information would:

• make it easier to ensure individuals pay the right tax after a change of job and possibly remove the need for the P45/P46 procedure;
• offer the prospect of simplifying the PAYE end-of-year reconciliation process for employers and HMRC;
• allow income-related benefits and welfare payments to better reflect the current circumstances of the individual; and
• remove much of the uncertainty that leads to errors in the Tax Credits system.

Centralised Deductions

In the future, it could be possible to build on this option and make a more substantial change (called “centralised deductions”) to the PAYE system in which the responsibility for calculating and deducting tax, National Insurance Contributions and student loans would be moved from employers to HMRC.

What the Improvements to PAYE Should Achieve

Combined with real-time information, this could reduce the employer burden by up to £500m and result in more accurate tax deductions, especially for those for whom PAYE currently works less well – pensioners, agency workers and those with several jobs. There could also be a significant reduction in the cost of administering PAYE for HMRC.

HMRC will consider making any change to the tax system by the extent to which it would:

• support the Government’s wider tax and welfare agenda;
• reduce costs borne by employers, individuals and HMRC;
• ensure people are subject to the right deductions without needing to apply for refunds;
• reduce tax unpaid through fraud and error; and
• promote economic growth.

The Discussion Document on Improving the Operation of Pay As You Earn (PAYE) can be found at www.hmrc.gov.uk/consultations, in the section ‘Current consultations’. The deadline for responses is 23 September 2010.