Pay As You Earn (PAYE) was introduced in the United Kingdom in 1944 as the system that HM Revenue & Customs (HMRC) uses to collect Income Tax and National Insurance contributions (NI) from employees’ wages and salaries.All UK employers must register with HMRC for purposes of administering a PAYE scheme. This registration is obligatory if employees have earnings at or above the Income Tax threshold or has earnings at or above the NI lower earnings level.Administering PAYE includes having to calculate tax deductions using a tax code system. Every employee is allocated a tax code which signifies their personal tax allowance and special conditions for each employee are represented in the tax code with a letter.The UK financial tax year runs from 6th April to 5th April the following year. Each tax year is then divided into 53 weeks (allowing for odd days at the end of the tax year) and also into 12 monthly periods.The operation of the PAYE system means that almost 90% of employees do not have to complete a self assessment tax return. It also means that for most people who are taxed under PAYE, no further recalculation of their tax position is required.In the 2008-09 tax year £225billion in tax, NI and Student Loan repayments was collected through the PAYE system. This cost almost £2billion to collect (£1.2billion for HMRC and £0.7billionn for businesses).In July HMRC published a discussion paper called “Improving the Operation of Pay As You Earn (PAYE)”. This focused on improving the time taken to transmit information to HMRC as a way of cutting costs for both the employers and HMRC. It also has the aim of improving customer service to bothe employers and their employees.The document gives details of “Real Time Information” (RTI). This is proposed to be the means by which HMRC will obtain its data about tax and deductions automatically each time a payroll is run. It is planned that if employees are paid by Bacs then the RTI data submission will form a part of the Bacs transmission process.At present at the end of each tax year employers have to file year end returns, but under RTI employers would be required to provide information when they do their periodic pay run for their employees, whether that is weekly, fortnightly or monthly. Employers would also have to provide details about employer NI payments at the time they pay over to HMRC the deductions.The paper also introduced a potential future change to PAYE in the form of “Centralised Deductions” (CD). If this is introduced then the responsibility for calculating tax, National Insurance and deductions would move from employers to HMRC.The decision following the July 2010 discussion is that RTI will proceed with a phased introduction starting in 2012. Changes the PAYE process in terms of CD is unlikely to start before 2015 though.The proposed RTI timetable is as follows:
April 2012 to October 2012 – Testing with a sample of employers
October 2012 to January 2013 – System changes arising from initial testing and further testing
From January 2013 – Large employers start to use RTI
From April 2013 – Medium employers start to use RTI
From August 2013 – Small employers start to use RTI
October 2013 – Process complete
On 3 December 2010 a further discussion paper was issued called “Improving the operation of Pay As You Earn (PAYE): Collecting Real Time Information”. The proposals in that document included the fact that employers, or the relevant payroll companies, would provide information to HMRC whenever they do their regular paroll run; the annual P35/P14 annual submission process would not be necessary; RTI submissions will be tied in to bank or Bacs payment software; small employers (less than 50 staff) who do not pay by Bacs will be able to submit using other software or an agent; it is not envisaged that the PAYE payment dates for employers will change from the 19th and 22nd of the month following; Benefits In Kind are not included in the proposals.HMRC see the benefits of such a system as being more timely information enabling HMRC to get more employees tax right in the year rather than later; a reduction in queries to HMRC; a better system for transfer of information when someone changes their job; less administration; better debt management in respect of employers.