Real-time PAYE to boost incentive to work

A radical revamp to the way the pay-as-you-earn tax system works looks set to hold the key to plans being drawn up by Iain Duncan Smith, the work and pensions secretary, for a single working age benefit.

HM Revenue & Customs has put out a consultation document on a revamped real-time PAYE system that will have big implications for employers and employees, but would also allow the Department for Work and Pensions to adjust tax credits and benefit payments as income changes, rather than months or even a year in arrears.

That would make it much easier to have a single benefit that covered both those in and out of work, or at least a single rate at which benefits are withdrawn as income rises - a measure that would help make it clear to those who are leaving benefit to go into work that they will be better off working.

That has been Mr Duncan Smith's declared goal, with Lord Freud, the welfare reform minister, set to work to make it a reality.

At present employers and pension providers deduct tax and national insurance from payments to employees and others and pay the money over to the Revenue shortly afterwards.

But they only report the full details of payments and deductions once a year, leading to over and under payments of tax.

According to HMRC, it has invested in new software that allows a single tax account to be created for individuals that brings together their full employment and national insurance records.

Building on that, the Revenue says, it would be possible to have details of all payments recorded as they are made, in real time.

That could remove the need for employers or employees to fill in forms to get the right tax code and pay the right tax on time, while radically simplifying what happens when people change jobs, the consultation document says.

But real-time earnings data would also remove the need for benefit and tax credit claimants to notify changes of income.

More claims for tax credits could be renewed automatically and huge amounts of fraud and error in the benefit system could be removed.

In 2008-09, error and fraud in the tax credit system alone amounted to £2.1bn, while housing and council tax benefit, where error and fraud amounts to £700m a year, could be paid more accurately.

Real-time earnings information would allow DWP "more easily to improve work incentives and smooth the transition between different benefits and between unemployment and work", the consultation document says.

At present, HMRC is simply consulting on the idea and yesterday it could not say how long it would take to introduce if the new system did go ahead.

One minister suggested, however, that it could be done "within the lifetime of this Parliament".

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