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PAYE Makes UK Headlines Again

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I would hope that understanding and reconciliation are not limited to the 19th hole alone - Gerald R. Ford

PAYE is back in the news. Last year, after the introduction of the new IT system, aka NPS, there was a lot of focus on PAYE under and over payments. MPs were up in arms, the press were baying for blood and HMRC came in for a right shoeing. Well, it’s that time of year again and PAYE, like a hard partying celeb, is again splashed across the pages.

The issue? HMRC have recently disclosed that around 1.2 million people have underpaid tax for the 2010/11 tax year. How have they screwed it up again? Well to be honest, HMRC are not really at fault, nor is the new IT system. The problem lies with how PAYE actually is designed to work.

The basic PAYE process is this: the employer pays an employee’s wages and deducts tax and National Insurance. The amount of tax deducted is based on the employee’s coding notice which the employer receives from HMRC. The tax year starts on 6th April and the coding notices are issued to employers before this date. And herein lies the problem: the coding notice is issued prior to the tax year based largely on information collected two years earlier. So something like this:

• Coding notice issued for 2011/12;

• Coding notice is issued in January 2011 (which is in the 2010/11 tax year);

• Coding notice is based on information collected on the 2009/10 tax year.

Due to the infrequent reporting to HMRC changes in employees’ circumstances can take a long time to be reflected in a revised coding notice and while the coding notice remains incorrect, the fact of the matter is that the wrong tax is being deducted at source. So the annual reconciliation is built into the process specifically to protect the exchequer against this deficiency in the system.

The thing to remember is that PAYE was designed in the 1940s when a job-for-life was not uncommon and where working multiple jobs was unusual. Now PAYE has fallen behind modern work practices and it’s time for change.

The solution? Well the launch of Real Time Information (RTI) is set to be fully functioning from 2013 and in time is to link with the Universal Credit scheme. RTI will be a big step forward for PAYE and will require much more frequent reporting by employers which should allow for more accurate coding notices. By 2014 PAYE underpayments should be a thing of the past.