PAYE - a clever but simple system we take for granted

Sir Paul Chambers was never a household name, even in his lifetime but he came up with an innovation that changed the economy. This was back in the early 1940s when the world was at war and those left behind in Whitehall began to think about the post-war era. We all know about the other institutions founded then, the National Health Service and state education for instance but less is said about the seismic shift in the way tax is collected. Before then, most people paid tax in arrears, calculating what they owed and paying a lump sum to the taxman. The system was clunky and fostered resentment every time tax came to be collected. Chambers’ idea was that pay should be deducted directly from most salaries before it reached the employee’s wallet. The system was called pay as you earn or PAYE. 

Most employees these days have their taxes collected via PAYE, with the upshot that they never see their full wage, a fraction of which is directly collected and sent to the government on their behalf by their employers. In the early days PAYE only covered income taxes but since then other taxes including national insurance have been added and the system has been exported and copied around the world. There is a famous quote that “the act of taxation consists in so plucking the goose as to procure the largest quantity of feathers with the least possible amount of squealing”. And the reason the Treasury adores PAYE is that it plucks the feathers far more efficiently than a system where people actively have to hand over the cash themselves. It is no coincidence that council tax is among the least popular of all taxes because you actually see it leave your bank account.

[with thanks to Ed Conway of The Times 19/2/21]

Funnily enough PAYE is easy in another respect, in administering the scheme through a payroll system. PAYE is all based on a simple method of a personal tax code. This code may vary through a year for an individual any number of times for different reasons but usually it’s the same all tax year. For ourselves providing a payroll bureau service nowadays these coding changes are all handled automatically online. So no errors and no delays, better still no administration cost. So whichever way you look at it PAYE is very successful.

The opposite extreme however is furloughing which for us handling on behalf of our clients is a real minefield and at times a nightmare. The UK is on the 5th version, so far, and each one is different where it counts – in the detail. Each time a new version is announced the biggest challenge is obtaining all the detail required in sufficient time - surprisingly difficult. Whereas PAYE is totally automatic, furloughing is just the opposite – it’s totally manual, with no system checks to help. This means that with hundreds of claims being made, covering thousands of employees, inevitably mistakes will be made. It’s also a costly extra task. The pressure is great but it’s just something we have to cope with.


This entry was posted in Payroll and tagged in Payroll, PAYE by Caroline

Why a sound Payroll system pays dividends

Payroll tends to be a poor relation but boy is it important when it’s wrong

One thing you can be sure of – if you mess up a payroll you’ll really know about it and it could have big consequences. That’s why it’s really important that whoever is responsible is accurate, reliable and on time. If not, it needs fixing.

Payroll and Covid 19

As if payroll wasn’t enough to think about the two very different furlough schemes, plus the new JSS job support scheme are trying the patience of everybody involved. It’s hard to overstate the pressure and strain this has put on those administering the schemes. For instance, there is still no information whatsoever on how the new scheme will work from the 1st November and the devil is in the detail. Even when announced it’s likely that the rules will change or some will be unclear or ambiguous. That’s not to say the scheme isn’t very welcome but there’s no avoiding the fact that it’s a significant extra burden on payroll staff. It’s easy to make a mistake and again there are implications. So there’s even more focus on the importance of having a really solid payroll before the complication of the schemes on top.
Probably never before have there been so many changes to employees on payrolls, all of which is extra effort and something more to go wrong. Those businesses lucky enough to be growing and there are plenty, will be expanding their payroll, which is extra effort.

Opportunities for Payroll Providers

Despite the pressures here are some ideas to help or improve.

•    Sort out payroll claims with CJRS and JSS

As the Job Retention Scheme (CJRS) finishes in October employers will have to make difficult decisions - either paying full wages or terminating employment. The new JSS is a third scheme - this involves subsidising non-working hours alongside a matching contribution from the government.

Remember with CJRS that for October the employer contributions have increased to 20% of wages and the government claims are now only for 60%. All October CJRS claims have to be made by the end of November.

Then JSS starts on the 1st November. This is for when employees work at least 33% of their usual hours. Any unworked hours can be subsidised by the employer and government, each contributing 33% towards these unworked hours.
The employer will pay the employees and then claim for the 33% value of the unworked hours in the month. The first claim in December will be for November and monthly thereafter.

•    Be able to prove your claim

Businesses need to be able to show that their claims were correct, in case there’s an HMRC check. Clearly there will have been a lot of fraud and mistakes - HMRC will be keen to recoup as much as possible. Some payroll software will keep an audit trail of your calculation.

•    Find better ways to handle variable hours etc.

Rather than keying in variable data look for technology to help – Excel or a portal for instance. Better processing of this information is an opportunity for improvement, cutting back on manual steps and possible mistakes. plus reducing the admin time involved.

•    Payslips

If your payslips are not electronic you’re really missing out on many benefits – speed, security, much lower cost and a much better service for the employee. Probably from a Cloud portal.

•    Look at HR alongside payroll

There’s a growing move to link payroll with HR so look out for software development. Clearly a lot of the data is the same and it’s inefficient to maintain two sets of such, especially if they are different. 

This entry was posted in Payroll and tagged in Payroll by Caroline