Contractors working through umbrella companies may be interested to hear that HMRC is to go ahead with a “real time” reform of the PAYE system.

From October 2013, it will become mandatory for employers to supply HMRC with information concerning income tax, national insurance contributions (NICs) and student loan payments every payroll day, rather than in accord with the current annual system. HMRC maintains that the new system will be much more accurate, making it easier for individuals to pay the right amount of tax after changing jobs. The P45/P46 process will ultimately be rendered obsolete under the new system.

Employers would, HMRC claims, benefit from a greatly simplified end-of-year PAYE reconciliation process. The current uncertainty which leads to errors in tax credits would also be largely abolished.

HMRC has announced that a pilot scheme involving software developers and volunteer employers will be launched in April 2012 following a period of consultation. Measures to ensure data quality will be introduced in October this year, with the aim that employers begin using the new system in April 2013 (it becomes compulsory in October of the same year).

The introduction of Real Time information will improve the PAYE system and, according to the Treasury’s Exchequer Secretary, David Gauke, make it “more accurate for taxpayers and easier for employers and HMRC to administer.”

HMRC spokesperson Stephen Banyard insisted that agency payroll providers and employers had been listened to, and plans have already been amended to take account of concerns raised. He urged anyone interested in being involved in the new pilot to contact HMRC.

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