HM Revenue & Customs (HMRC) is fundamentally changing the way PAYE is reported. A system known as real time information, or RTI, takes effect this month.
Under the PAYE system, employers deduct income tax and national insurance contributions (NICs) from employees’ wages. At the end of the tax year, when the annual return is completed, the overall liability is reviewed and calculated.
Under this system, inaccuracies can go undetected for long periods, and individuals inadvertently pay the wrong amount of tax. The new system aims to ensure that more individuals pay the right amount throughout the tax year.
Essential aspects of the system will remain the same: tax codes, deducting tax and NICs, RTI will require employers and pension providers to submit deduction information to HMRC for PAYE, NICs and student loans as or before each payment is made, rather than at the year’s end. HMRC believes that RTI will make it easier to ensure individuals pay the right amount of tax following a change of job and reduce the number of forms employers have to submit. They will still need to provide P45s and P60s to employees, and to complete forms P11D and P11D(b) in respect of taxable benefits and allowances.
The information on employment income will be used to administer the universal credit welfare benefit, which comes into force later this year.
The new system is being phased in from this month, with all micro, small and medium-sized businesses and most large employers and payroll bureaux set to begin sending payroll information to HMRC in real time from this date. Businesses with more than 5,000 employees will arrange a migration date with HMRC between April and October, when the scheme will be mandatory for all employers.
HMRC will have notified employers that they must begin using RTI. It is important to prepare. Employers may need to change some business systems and procedures to ensure staff are paid on time. Failure to submit PAYE data on time via RTI could lead to penalties.
Until October 5, 2013, employers with fewer than 50 employees, who find it difficult to report every payment at the time, may send information to HMRC by the date of their regular payroll run, but no later than the end of the tax month.
You need to check in advance that your payroll data is accurate and in an appropriate format for RTI. The information that you submit will be matched against records on HMRC databases, and any discrepancies could lead to inaccurate tax or trigger a compliance check.
Depending on how you pay staff, make sure software is compliant, that your payroll provider is ready and getting the information needed, and that Bacs instructions are as required. There are several types of submission under the new RTI system.Full payment submission (FPS) is the main type, and contains details of all employee payments and deductions, weekly or monthly, above or below the NICs lower earnings limit, including income tax, NICs and student loans, together with details of any new employees and those who have left the business. The first FPS should include all employees who have been employed during the current tax year, including starters and leavers, or those who have not yet received a payment, together with the hours normally worked.
Employers can submit separate FPSs for weekly paid and monthly paid staff, and another for leavers.
Subsequent FPS’ will only contain pay and deduction details for employees who are actually being paid on that payday. The final submission for the tax year must indicate that this is the case and answer relevant questions and declarations.
You may also be have to make other submissions, depending on circumstances, to align your records with those at HMRC, especially for larger payrolls or where a company has to have several.
A separate submission is also needed when there are no payments to staff in a pay period, or to notify changes or reclaim payments, and another to correct totals in the previous year’s final FPS.
This article is for general guidance only. Rennie Welch can offer help with all payroll needs. Contact us on 01573 224391.