Government proposes ‘real time’ changes to PAYE payments

The government is considering radical reforms to PAYE in an attempt to adjust individuals' tax payments in almost “real time” as their circumstances change, minimising the need for end of year adjustments.

The proposals were revealed by Exchequer secretary David Gauke while making a Commons statement on the flood of demands for extra tax payments or notices of rebates resulting from delayed reconciliations two years ago and the use of a new system unifying individual taxpayer records.

The new system - costing close to £400m - automatically consolidates individuals' records instead of relying on manual reconciliation of records in different offices dealing with employers' records. It threw up a much larger number of end of year adjustments, with 4.3m identified overpayments totaling £1.8bn in tax since April 2008, and 1.4m further demands for an average of £1,428 each.

Gauke told MPs he had been "aware" of problems with Pay-As-You-Earn "since day one" and had raised proposals for reform. He said "inefficient and clerically intensive" reconciliations required every year to bring estimates of income in line with actual income for the year were not carried out last year requiring catchup now.

He said PAYE was introduced when most people had only one job — many for the whole of their working lives. But now it was common for taxpayers to have income from multiple sources. He attacked the last Labour government for having failed to modernise the system to cope with this.

He said: "The system is outdated, inefficient and burdensome to the Exchequer and taxpayer alike. We need PAYE to reflect the employment issues of the 21st century and that will be a focus of reforms that we take forward as part of our wider strategy for reform."

Gauke said Commons Treasury Committee member and Tory MP Michael Fallon was "absolutely right" that "we need to move to a system that reflects modern working and allows tax payments in real time rather than on the guesswork in advance of the tax year or reconciliation a year or two later".

He cautioned against claims that taxpayers will be able to use the A19 concession to object to demands for more tax. He warned it was a measure that " in practice doesn't apply that often", adding: "I don't want people to build up their hopes that it will be some kind of panacea."

He said the government "are not in a position to wave goodbye to £2bn" and to do so would not be fair to those who had paid the right amount of tax.