You might have heard that there’s a big shake-up coming to the way that income tax is calculated and reported. PAYE Modernisation is described by Revenue as “the most significant reform of the administration of the PAYE system in over 50 years”.
It addresses a number of changes in society that have happened over that time. When PAYE was introduced in 1960, many people had a job for life and payroll was a manual process. Fast forward to now, and the workforce is much more dynamic. People change companies more often. Many work through agencies, or have several jobs at the same time. The rise in divorces and separations has an impact on their allowances.
What is changing?
The current cycle of annual reporting and reconciliation means that employees must wait until the end of the year for any tax refunds due to them, and they run the risk of having to settle an unexpected bill for underpayment.
PAYE Modernisation aims to ensure that employees receive their full entitlements throughout the year, so they don’t have to wait for a year-end reconciliation. The process will require employers to submit their pay, tax and other deductions to Revenue every time a payroll is run, starting from 1 January 2019. In return, it will ensure that employers and employees have the most accurate and complete information, so that the right tax deduction is made at the right time. This will particularly benefit employees who have more than one job.
How will it work?
The expectation is that the reporting process to Revenue will be fully integrated into the payroll run, and managed by payroll software, where it is used. Indeed, Revenue describes PAYE Modernisation as “a by-product of the employer payroll process”. As such, although the frequency of reporting will increase, the process of reporting to Revenue will be streamlined, cutting admin costs. The system will automatically generate an end-of-year reconciliation for the employer, for example. With more regular reporting, it will no longer be necessary to file forms P30 (monthly or quarterly return), P35 (end of year return), P45 (employment termination), P46 (new employee) and P60 (employee end of year certificate). These forms currently take a significant amount of time to complete and file, and there were 2.5 million reports or payments under their requirements in 2016. Thanks to PAYE Modernisation, they will all be eliminated.
The new system will also help to reduce the hidden costs of payroll: error and employee contact. Greater accuracy and transparency will reduce the time spent fixing errors and fielding queries from employees. Employees will be able to view and manage their tax with their online Revenue account.
Although 2019 might seem a long way off, you can start preparing now. In the next blogs in this series, we’ll tell you more about how PAYE Modernisation will change your payroll process, the timeline for implementation and what you can do now to ensure you’re prepared.