The consultation on draft legislation for HMRC's move to 'real time' information ended earlier this week. From October 2013 all employers must use the new system, which will see pay slip data on tax, NIC and other deductions transmitted to HMRC at the time employees are paid, rather than once year. P45s will become a thing of the past.
Real Time Information is fundamental to the introduction of Universal tax credits, also in October 2013, as part of the Government's reform of the social security system.
The hope is that by providing the Department of Work and Pension with up to date accurate information about an individual's earnings, the incidences of tax credits being overpaid and subsequently reclaimed will be dramatically reduced.
John Harding, tax director at PwC has welcomed the modernisation of the 1940s PAYE model, which he believes in the long term should also help prevent the tax code errors which have affected many people. But he warned the tight timescale could cause major issues for employers and make glitches likely when the new system is first introduced.
Harding said: "The modernisation of PAYE is long overdue. The system dates back to the end of the second world war when most people had one job, often for life, and were paid in cash. Given complex working patterns today it's surprising it's coped as well as it has.
"But we could well be heading for a perfect storm given the scale and timing for change. Real Time Information will see employers gathering and transmitting considerable volumes of data, beyond what is already on the payroll system. Timescales are incredibly tight for getting the processes in place across the many parties involved, let alone training and communications. All this will be happening when many employers will be grappling with the challenges automatic pension scheme enrolment presents. Yet the launch of Universal Credits means there's no leeway on timing.
"There is likely to be a level of confusion among employees as they get used to the new system. However, few are likely to be sorry to say goodbye to the dreaded P45."
