Are you aware of the major changes coming soon with the PAYE system? If not, you are not alone, in a Sage survey from 2011 76% of small firms admitted to having no knowledge of the forthcoming alterations.
The PAYE system has been in place, largely unchanged, since its inception in 1944. Over the next two years HMRC is planning substantial changes to the reporting regime behind PAYE. HMRC is now introducing the concept of ‘real time information’ (RTI) where employers will be required to provide information about tax and other deductions to HMRC each time an employee is paid. This new system will affect all employers, large or small and will affect all employees whether full time, part time or temporary.
Why the change?
The new system is being introduced to provide more accurate and up to date information on employees and pensioners. The government believes that RTI will improve both the UK tax and welfare systems. RTI is also a key component of the Department for Work and Pensions (DWP) plans for the introduction in October 2013 of the Universal Credit system. Universal Credit will replace the current benefits structure. DWP will use RTI to award and adjust Universal Credits to take account of employment and pension income.
When is the new system being introduced?
The system will be mandatory for all employers by October 2013. From April 2012 the system is being piloted by software developers and volunteer employers to ensure it is thoroughly tested and issues resolved by April 2013. Employers and pension providers will need to start submitting RTI from April 2013, with all employers using the system by October 2013.
Although the deadline for implementation of RTI is tight, HMRC has indicated it must happen in this timeframe to tie in with Universal Credit implementation.
What is the current system?
At the moment payroll is processed, employees are paid in accordance with their pay frequency and then a monthly or quarterly payment of PAYE and National Insurance is sent to HMRC. Employers provide information about an employee’s pay, and the tax and National Insurance deducted from that pay, to HMRC after the end of the tax year via an employer annual return. These year end returns must reach HMRC by the 19 May after the end of the tax year to which they relate. This means that the PAYE system is always operating in arrears, because at no time during the tax year does HMRC know anything about employee earnings.
How will RTI work?
Instead of supplying information once a year after the end of the tax year, employers will need to provide information to HMRC every time an employee is paid, whether that is weekly, fortnightly, 4-weekly, monthly or payments at any other frequency available. Every time a payroll is run, the payroll software will collect the information required by HMRC and send it using the BACS facility, Government Gateway or internet channel. With BACS, RTI information will be sent to HMRC at the same time as their net pay instruction is made for employees.
What are the benefits of RTI?
- No year end payroll returns are required as employers will submit the information progressively throughout the year. Employers will need to continue to produce P60 forms.
- It should reduce the frequency and size of under and over payments of both tax and tax credits.
- Currently where an employer takes on a new starter without a form P45, the employer must complete a form P46 and send it online to HMRC. Under RTI the P46 form will no longer exist but an employer will still have to ask a set of questions similar to those on P46 and these details will be submitted via RTI when a new employee starts work.
- It should result in more accurate student loan deductions.
What should you be doing now to prepare for RTI?
Although April 2013 may seem some way off, there are things that employers can do now to prepare for the introduction of RTI.
- Check that the information you hold on employees is accurate. The quality of the data submitted will be key to the success of RTI. It is crucial that all employers provide four pieces of key information on each employee – full name, actual date of birth, gender and National Insurance number.
- Speak to your payroll software provider to ensure your software is up to date pre RTI implementation. The last thing you want is to have any last minute system issues and find yourself in a queue with other employers waiting to upgrade their system.
- Ask your payroll adviser for help and support on what you need to do to mitigate against the change. Your accountant or payroll bureau should be fully up to speed on RTI and what you need to do, to be prepared.
For more information on RTI or on any payroll matter the Chiene + Tait payroll team is ready to assist. Please contact Neil Cameron, Payroll Manager or Carol Flockhart, Partner by email email@example.com or call 0131 558 5800. Free information on Chiene + Tait payroll services can be found here.