Rather than leaving employers to process different tax codes and pay income tax for employees, the new system would automatically deduct income tax and national insurance contributions directly from an employee’s gross pay as it is paid into their bank account.
A briefing document seen at the weekend by The Daily Telegraph says: “The administrative burden on businesses, especially small businesses, should be significantly reduced [under the new process]. Employers will no longer need to calculate the various deductions for employees and will simply need to ensure that the correct National Insurance Number is associated to the payment.”
The Tories, are also reported to be in talks with various technology providers who are developing the system, said the plans have been made in response to the increasing failures of the current tax system.
David Gauke, shadow Treasury Minister, said: “The cumbersome system is a significant burden for employers, HMRC and taxpayers. We urgently need to look at moving to a real-time PAYE system where income tax and NICs are deducted automatically as gross salaries are paid.”
Mike Warburton, tax partner at Grant Thornton, said: “The PAYE system has been creaking at the hinges and has been in need of a serious review for years. British companies have been used as unpaid tax-collectors for years which is fine for big companies with payroll departments but can be a big weight on smaller ones. There are of course risks – both in terms of security and technology – but this could go a long way to helping many companies.”
Critics have argued that the current system, which is still paper based, is ill equipped to cope with individuals that changes jobs more frequently and often have multiple sources of income. The Public Accounts Committee said that HMRC has a backlog of 17m PAYE cases to address. The National Audit Office last year estimated that 4.5m people paid too much tax under PAYE and 1.5m not enough.
The Tories also argue that the paper system in a wasteful use of the HMRC’s resources and that the new system would free up revenue officers to collect tax evaders instead.
