Sharing 80 Years Of PAYE

We discuss the last 80 years of PAYE, including what happened before, its introduction and what has happened since.

In April 1944 HMRC, formally known as the Inland Revenue sought to simplify the way workers would pay their taxes with the introduction of Pay As You Earn or PAYE.

What Happened Before PAYE?

Previously, workers were expected to complete an annual assessment and pay the tax due in two half-yearly instalments, which meant that tax was paid in arrears after the income had been earned, similar to what is now known as Self-Assessment. This worked initially, but after the Second World War, tax rates and wages rose, and that meant more workers became liable to pay taxes. Many of these workers found that paying the tax in two large amounts each year caused hardship, so a new way of collecting the taxes due, was required.

Initial Steps

In 1940, initial steps were taken to streamline the collection of taxes, by creating a scheme where four-weekly paid manual workers allowed their employers to deduct the half-yearly tax payments, over a period of weeks, in turn spreading the cost. This caused problems for employees though if their earnings varied. In addition to this, the Inland Revenue would also miss out if a worker was out of work at the time the payment was due.

PAYE was introduced in both the US and Canada, and after a period of consultation, it was decided that a move to weekly collection based on current earnings, would be the best approach. It was advertised as “A New System for the Taxation of Weekly Wage Earners”. Big changes were required for both employers and employees, and explanation of these changes, such as the introduction of tax codes was needed.

What’s Changed In The Last 80 Years?

Over the last 80 years, we have seen many changes to PAYE since 1944, one of those being the introduction of National Insurance to the system in 1975, and computerisation of the scheme in 1984.

More recent changes include the introduction of Real Time Information (RTI) in April 2013, where employers are required to file the payment data electronically on or before each pay date. This allows HMRC to receive up to date, Real Time Information on wages and tax deductions, where it was previously reported annually via Form P35 at the end of the tax year. The main benefit of PAYE is that it enables most workers to be kept out of Self-Assessment, unlike many other countries, where this is still required. Employees can also view up to date information via their Personal Tax Account.

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Disclaimer - All information in this post was correct at time of writing.