Every employee in the UK is paid through the Pay as You Earn (PAYE) scheme with both Income Tax and National Insurance Contributions (NICs) deducted at source from the employee's salary and paid over to HMRC together with the employer's NIC payments. Tax deductions are made pursuant to a notice of coding issued by HMRC and based on information from the employer's end of year payroll returns and the taxpayer's tax return if they are required to submit one. This system has generally worked well but it has some significant flaws.
The major problem is that inaccuracies are hidden until the end of the tax year when the employee makes the annual salary return and the correct amount of tax due is calculated and compared to that deducted through PAYE. In order to resolve this problem, PAYE reporting is about to change significantly with the introduction of Real Time Reporting (RTI). Under the new system the employee will file an electronic report every month along with their employee's tax and NIC payments so that errors are detected much more quickly. RTI will also simplify the end of year payroll reporting process.
The new system is currently being trialled and will be introduced from April 2013 at the start of the new tax and payroll year, becoming obligatory from October 2013. Any good commercial payroll software should be compliant from the start of the 2013/2014 tax year and small employers with less than nine staff can use the free but basic HMRC payroll tools. Employers will be informed of the need to use RTI 4-6 weeks before they need to operate the system but the onus is definitely on employees to be ready in time so it is very important to understand the system in advance.
In order to prepare for RTI there are a number of things to think of:
1. You should check when your payroll software will be compliant with RTI and make sure it is updated in good time to implement the new system.
2. You must make sure your salary records are in order, with the correct name (in the stated order), date of birth and NI number for each member of staff
3. Be prepared to update BACs references which will need additional characters to identify them as RTI payments
RTI should make life easier in the long term by providing more accurate and up to date information on payroll. It will also simplify the end of year payroll reporting. Inevitably there will be some problems in setting up the new system but careful preparation and good professional advice will prevent many difficulties.