Real-time PAYE tax system proposed

Amid criticism that the current system is outdated, inefficient and burdensome

Current PAYE system is "outmoded"

The government is considering further reforms to HMRC computer systems to enable the tax authorities to make close to real-time changes to individuals' tax codes as their circumstances change.

This would minimise the need for end-of-year adjustments.

Exchequer Secretary David Gauke admitted there were proposals for such a system after being forced to make a Commons statement on the flood of demands for extra tax payments, or notices of rebates resulting from delayed reconciliations two years ago.

Consolidating individuals' records instead of relying on manual reconciliation of records by different offices threw up a much larger number of end-of-year adjustments than expected, with 4.3 million identified overpayments totalling £1,8bn in tax since April 2008, and 1.4 million further demands for an average of £1,428 each.

Gauke said he had been aware of problems with PAYE "since day one" and had raised proposals for reform. He said "inefficient and clerically intensive" reconciliations had been required every year to bring estimates of income into line with actual income for the year.

He told MPs that PAYE had been introduced when most people had only one job — and that many maintained this for the whole of their working lives. But now it was common for taxpayers to have income from multiple sources.

He criticised the last Labour government for having failed to modernise the system to cope with this.

He said: "The system is outdated, inefficient and burdensome to the Exchequer and taxpayers alike. We need PAYE to reflect the employment issues of the 21st century and that will be a focus of reforms that we take forward as part of our wider strategy for reform."

Gauke said Commons Treasury Committee member and Tory MP Michael Fallon was "absolutely right" that "we need to move to a system that reflects modern working patterns and allows tax payments to be made in real time rather than on guesswork in advance, or reconciliation a year or two later".