Currently, the paper-based PAYE system means that employees have both their income tax and national insurance contributions (NICs) deducted at source by their employers. Although HMRC provides individual tax codes, it’s up to the employer to calculate the amount due.

The Tories are now looking at changing this by introducing a new automated bank-based system that would automatically deduct tax and NICs directly from employees’ gross pay, as it’s paid into their accounts.

The new system could save businesses up to £5.5bn, say the Tories, and could increase revenues to the taxman by £1bn.

“The cumbersome system is a significant burden for employers, HMRC and taxpayers,” says David Gauke, shadow treasury minister. “We urgently need to look at moving to a real-time PAYE system where income tax and NICs are deducted automatically as gross salaries are paid.”

It’s understood that the Tories are in talks with several technology providers who are developing the system.

“The PAYE system has been creaking at the hinges,” says Mike Warburton, tax partner at Grant Thornton. “British companies have been used as unpaid tax-collectors for years, which can be a big weight for smaller companies. This could go a long way to helping many companies.”

A Conservative briefing document says the administrative burden on businesses – especially small businesses – would be “significantly reduced” under the new system.

“Employers will no longer need to calculate the various deductions for employees and will simply need to ensure that the correct National Insurance Number is associated to the payment.”

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