What is it and why is it needed?
Introducing Real Time Information is the biggest change to the PAYE system (for the deduction of income tax and National Insurance) since its introduction to the UK in 1944. HMRC is making significant changes to the way that all payroll-related deductions will be reported by employers. At present, employers submit an annual year end return; however, under RTI, employers and pension providers will be required to inform HMRC about deductions as they are made each week / month – or in other words, in ‘real time’. Some processes and documentation such as payslips, P45s, P60s and employee benefit reports will not be altered at this time but may do at a later stage.
The RTI system will be introduced concurrently with the new Universal Credit System that the Department for Work & Pensions will be introducing nationally in 2013. It has been designed to swiftly process all the necessary information for handling tax credit claims and the government is moving quickly on this implementation. HMRC believe that employees should notice a visible reduction in tax and/or tax credit payment discrepancies, which is something that HMRC has commonly been blamed for.
No-one wants to pay the incorrect amount of tax and there are still too many nightmare stories about people who have been overpaid/underpaid tax credits. The current system has meant that HMRC is always working a year behind and, therefore, has no idea how much tax, National
Insurance or student loan deductions have been paid and how much gross pay has been received until after the end of each tax year. Paula Frame is the Payroll Development Manager for PEM Payroll and she has direct experience of when things can go badly wrong:
“In one instance HMRC incorrectly believed that an employee was working for two companies and put him on the wrong tax code. If PEM hadn’t investigated this in a timely manner, their salary would have been reduced to virtually nothing. In a second example, an employee earned a large bonus on a particular month. Student loans are paid as a proportion of the individual’s monthly income (without being able to take account of how much is actually owed). In this case, if we had not intervened, it would have meant that the employee would have overpaid the whole of their debt to the student loan company. In both cases, the ramifications for these individuals could have been very serious indeed.”
There have been understandable concerns about ‘hidden government agendas’ and ‘Big Brother-style monitoring’, however PEM Payroll see the new RTI system as a positive change. As long as the transition is managed sensitively for the payroll bureaus and the employers, individual employees should benefit from a fairer system overcoming the problems of incorrect tax codes and some of the complexities of the tax credit system. Employers need to realise how quickly this is all going to change so that they can be properly prepared.
The pilot scheme:
The PEM client involved in the HMRC pilot scheme is going to be one of only 300 such guinea pigs across the country who will be participating at this early stage. As part of the pilot, PEM will be supported by a designated relationship manager from HMRC, who will guide them over the next 12 months; helping them to troubleshoot problems. PEM Payroll is different because it isn’t a typical standalone payroll bureau. With access to the whole of PEM’s resources it is able to offer an integrated and holistic approach to its clients’ needs (such as advice from PEM’s employment tax specialists)
PEM will be upgrading its software systems, which is an additional expense but one that is justified as it will allow PEM to better serve its clients during this period of change. By the time RTI becomes a mandatory requirement, PEM Payroll will have accrued 18 months of proactive and productive experience which should enable the real time reporting to be done smoothly and seamlessly.
How can employers prepare?
Employers can take steps in advance of the RTI deadline to make sure that their payroll and/or HR systems have the necessary functionality. The need to make sure all payroll data is correct will be essential. Even the slightest data discrepancies, such as the misspelling of names, will cause disruption to the smooth implementation of RTI – so it is worth carrying out a quality control data review. Where employers use outsourced payroll services (like PEM Payroll), this can be a straightforward matter, but for other employers it could be a meticulous and painstaking process with the entire onus on the employer.
What are the benefits?
The 5th of April is currently an extremely important and highly stressful day in the payroll calendar as it is the end of the tax year, but only until the RTI system is introduced; as this date will no longer have the same significance. The average employee may not be aware of the complexities of their employer’s payroll system; often simply receiving a payslip – so for them the benefits may not become immediately apparent – but they should see an improvement in the operation of the tax credit system. For other individuals that have more complex tax affairs requiring an annual tax return, the changes will hopefully make their PAYE tax payments more accurate, fairer and with less potential for errors and surprise underpayments.
Notes to Editors:
• Peters Elworthy & Moore (PEM) is one of the leading independent firms of accountants, tax and business advisers in the East Anglia region, with 14 Partners and 140 staff.
• PEM is within the top 60 in the UK, providing financial strategies for success.
• PEM has a large and varied client base including a substantial portfolio of technology and owner managed business clients. Visit http://www.pem.co.uk and www.pemtechnology.co.uk