The Conservatives are working on proposals to scrap PAYE and replace it with a new automated bank-based system. This would remove from employers the headache of administering tax deductions. Businesses would no longer be unpaid tax collectors and there would be a significant saving in time and costs.
PAYE has been with us since 1944. It was introduced to help improve the efficiency of tax collection after five years of war.
Under the proposed system, income tax and National Insurance contributions would automatically be deducted from an employee’s gross pay as it reaches the employee’s bank account. The Revenue will have responsibility for calculating the tax and National Insurance due.
How will the scheme work in practice?
Payroll administration will change radically. It may work like this:
- The employer will send details of each employee’s gross pay to the revenue through the BACS
- The Revenue will calculate the amount of tax and National Insurance to deduct from the gross pay
- The Revenue sends back net pay information to the employer
- It is currently unclear if the Revenue will also calculate the employer’s National Insurance liability
The proposal leaves many questions unanswered such as:
- An individual’s gross pay may be made up of taxable and non-taxable items. How would the Revenue deal with this?
- How will the system deal with pension contributions, gifts to charity and other deductions from pay such as attachments to earnings?
- A business would have to review its cash flow. The current PAYE element would leave the business bank account two weeks earlier than it does at present.
- All business payroll software would become redundant.
- Many payroll professionals would become redundant.
It is an interesting proposal, and I think many small business owners would welcome its introduction.
If you would like to discuss this topic further, please do contact me.