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The need to raise revenue for the second world war effort saw the number of taxpayers increase from 10 million to 14 million. This growing number of taxpayers required a more efficient tax collection system than annual or six-monthly collection, so in 1944 the Pay As You Earn (PAYE) system was introduced. However, the system struggled to cope with 21st century working practices where employees might move frequently between short-term contracts or work for several employers at the same time. 

In 2010, HMRC issued a consultation document on reforms to the PAYE system, with two separate aspects considered. Real time information (RTI) would submit details of pay and deductions to HMRC every time an employer ran their payroll. Centralised deductions would build on RTI, with responsibility for calculating tax and NIC being taken over by HMRC. There was considerable opposition to the idea of centralised deductions, so this aspect was rejected. There are currently no plans to implement it.

RTI has been mandatory since October 2013, so the vast majority of employers now have to report PAYE in real time. Many aspects of RTI are quite detailed, such as the reporting requirements, so it is therefore only possible to provide a summary of the more important areas. The focus is on smaller employers having to run PAYE for the first time because RTI can be particularly onerous where just a few employees are involved.

RTI is essential to the operation of universal credit which is currently replacing income-related benefits and tax credits, with full implementation possibly by 2017.


The introduction of RTI has not altered the fundamentals of PAYE. The original intention was that employers would be required to pay their employees using the banks’ BACS payment system. This idea was not implemented, so employees can still be paid by cash, cheque or any electronic basis.

At the start of the tax year, HMRC issues a tax code for each employee. This is used to calculate how much income tax is due every time an employee is paid, be it weekly or monthly. RTI allows HMRC to update tax codes more frequently, so in theory PAYE should be more accurate with less need for repayments and tax demands after the end of the tax year.

The PAYE deducted, along with NICs, is paid over to HMRC on a monthly basis. The due date if paying electronically is the 22nd following the tax month. For example, the payment for August 2015 (the tax month to 5 September) must be received by 22 September 2015. Smaller employers, whose total PAYE/NIC payment is estimated to be (on average) less than £1,500 per month, can pay on a quarterly basis.

Employees employed at the end of a tax year must be given form P60 by 31 May following the tax year. This summarises total pay and deductions for the year.

Benefits and expense payments remain outside the scope of RTI, so where necessary forms P11D (and maybe forms P9D) must be completed and given to employees by 6 July following the end of the tax year. However, from 6 April 2016, a formal basis of payrolling benefits is to be introduced so that taxable benefits can be included within the normal payroll. Benefits that have been payrolled will not then need to be included on form P11D.

PAYE schemes

If all employees are paid below the NIC lower earnings limit, then an employer might not be required to run a PAYE scheme - so no RTI reporting will be necessary. But the employer must be very careful in this situation. For example, if just one employee has two jobs, then they may need to be taxed at the basic rate, meaning that PAYE deductions are required. It will then be necessary for the employer to run a PAYE scheme and report details for all employees under RTI. So it is essential for an employer to establish the correct tax status of each their employees.

Prior to the introduction of RTI, it was not necessary to report PAYE details where an employee had earnings below the NIC lower earnings limit. With RTI, if an employer is operating a PAYE scheme then PAYE details have to be reported for every employee. 

Payroll software

RTI must be reported electronically, with no option to produce payroll manually. It is therefore necessary to either use payroll software (some of which is available for free), or to use the services of a payroll provider. The use of payroll software automates much of the payroll process, especially where employees are paid a regular salary.

An option for employers with no more than nine employees is to use HMRC’s free Basic PAYE Tools package. Although not a full payroll package, this calculates PAYE deductions and reports the relevant information to HMRC. However, many users have commented that they are far from happy with HMRC’s product.

FPSs and EPSs 

Employers must report details of pay and deductions to HMRC every time that employees are paid. This is known as a full payment submission (FPS), and must be submitted either before employees are paid or at the time of payment. Of course with payroll software, the FPS process is simply an extra step after having run the normal payroll.

There are a various circumstances where an employer payment summary (EPS) might also need to be submitted, although payroll software will again make the submission fairly seamless. Virtually all employers can claim the £2,000 a year NIC employment allowance. With payroll software, this will just be a case of setting the employment allowance indicator, which will then be submitted as an EPS. An EPS will be used if there is any reduction in the amount that an employer owes HMRC because of reclaimed maternity, shared parental or adoption pay. It can also be used to indicate that no employees will be paid for up to six months.

An EPS has to be submitted by the 19th following the tax month to which it relates. For example, an EPS for August 2015 (the tax month to 5 September) must be received by 19 September 2015. 

Other points

It is necessary to report the number of hours an employee works each week. For each employee, it is simply a matter of selecting the most appropriate of five bandings:

A Less than 16 hours
B 16 hours or more but less than 24 hours
C 24 hours or more but less than 30 hours
D 30 hours or more
E Other (such as an irregular work pattern)

With payroll software, it means just having to initially set an employee’s record and then updating if the work pattern changes.

Payments to temporary, irregular and casual employees must all be reported. 

No year-end returns are submitted to HMRC because all relevant information is reported during the tax year.

New employees

For a new employee, the employer will need the employee’s full name, date of birth, national insurance number, gender and address. 

If previously employed during the tax year, then the employee will normally have form P45 from their previous employer. Form P45 will show the employee’s leaving date from their previous employment, pay and tax paid to date, and tax code at the time of leaving. This information is provided to HMRC as part of the usual RTI filing process. 

Employee leaving

When an employee leaves, it is simply a matter of including the leaving date on the FPS when the employee receives their final pay. The employee must be given form P45, although this will automatically be produced by payroll software.

Small businesses

A small business might have just one or two employees who are paid a fixed weekly wage. With RTI, this would strictly mean having to submit a FPS every week of the tax year – a fairly onerous requirement, and expensive if a payroll provider is used. Until 5 April 2016, however, the reporting requirements have been relaxed for micro businesses with nine or less employees (provided the business was running payroll prior to 6 April 2014). Rather than reporting weekly, a micro business is allowed to submit just one FPS at the end of each tax month. 

When the relaxation comes to an end, employers may want to move employees to a monthly salary. Another option is to submit several FPSs upfront at the same time (for example, the FPSs for a month could be submitted at the start of that month), but care is needed here because payroll details could change or an employee leave.

A director of an owner/managed company (with no other employees) may take a low level of remuneration (maybe sufficient to use the personal allowance) with the balance of income withdrawn as dividends. Because NIC thresholds are applied on an annual basis for directors, there is likely to be just one payment to HMRC which will be due for the final quarter of the tax year. However, FPSs are still required monthly.

Again, submitting several FPSs in advance is an easy solution. For example, April, May and June could be filed together prior to the April submission deadline. Such quarterly filing will tie in with the deadlines for quarterly payments to HMRC (even though there is just the one payment). It is also possible to set up an annual PAYE scheme, but these generally seem to result in too many problems to justify the small time saving.

Businesses with a fluctuating, weekly paid, workforce (such as those in the catering and entertainment sectors employing casual staff) have particular reporting problems. There is a seven-day grace period before having to report pay, but this only applies to certain employees – such as casual employees and piece workers.


Penalties are charged for late FPSs, although there is a three-day grace period before a penalty is imposed. An employer is not penalised for the first late submission during a tax year, but any subsequent late filing during that year will result in a penalty. Penalties are applied on a monthly basis, so there will be just one penalty even if more than one submission is late during any particular month. The amount of penalty ranges from £100 to £400 depending on the number of employees. HMRC can charge an additional tax-geared penalty where filing is more than three months late.

An inaccurate submission could also attract a penalty if the employer has not taken reasonable care. 

An employer can be late with one monthly or quarterly payment without penalty during a tax year (unless the payment is more than six months late), but a subsequent late payment will result in a tax-geared penalty. The employer will also be charged daily interest for late payments.


The introduction of RTI has not been without teething issues, although the system is now working much better than many people expected. For employers running their own payroll, problems can be minimised by using good quality payroll software rather than relying on HMRC’s free Basic PAYE Tools package.