Navigating the 21st Century – is PAYE still fit for purpose?

Introduction

In an era defined by technological advancements, shifting work patterns, and evolving financial landscapes, it’s essential to assess whether traditional tax systems such as the pay as you earn (PAYE) scheme, along with expenses and benefits, are keeping pace with the demands of the 21st century. This blog delves into the effectiveness of these systems and explores whether they are still relevant and efficient in today’s dynamic work environment.

I joined HMRC in 1983 and it gave me 20 years of experiences. This was back in the day of employees queuing on a Friday lunch for their brown envelope filled with cash and the tax and national insurance (NI) written on the front of the envelope. Benefits in the main were limited to company cars for sales reps. The tax calculation system was manual, and employers completed P11 deduction working sheets, that were A4 in size.

Has PAYE kept pace and is it fit for what is now an ageing working population with birth rates slowing down, meaning we will be working longer whilst getting older. What does the modern employer need to provide and more importantly what does the employee want as their reward package?

The evolution of PAYE

The PAYE system, introduced in the UK in 1944, was designed to simplify income tax collection. It worked effectively for decades as it required employers to deduct tax from employees’ wages before paying them. However, as work patterns evolved, with more people engaging in freelance, gig, or remote work, the traditional PAYE system started showing signs of strain.

The modern world

Employees, or perhaps I should say worker have new drivers and a new outlook towards work, especially in recent years. The modern employee wants different rewards and challenges, and it does not all fit in your traditional 9 to 5 day. Wellbeing, both health and mental, maybe far more important than salary.

There is also the need to get those of working age, who have become economically inactive, back into employment. This is a diverse range of people, some choosing not to work, others not able to and some not being given the opportunity or where work does not make financial sense.

Flexibility and the gig economy: The rise of the gig economy brought about challenges in the application of PAYE. Workers in this sector often have multiple income streams, making it complex to calculate and manage tax deductions accurately. HMRC’s status tools are flawed and many say not fit for purpose, but does the flexibility that the modern worker needs, mean that the label of self employed or employed no longer applies?

Remote work: The 21st century saw a significant increase in remote work arrangements, especially after the COVID-19 pandemic. This shift created questions about tax jurisdiction, as employees no longer had a fixed place of work.

Expenses and benefits: Expenses and benefits offered by employers have also evolved over time. These can include company cars, health insurance, or even remote working allowances. While these perks were once straightforward, they now require careful consideration in the modern workforce.

Remote working: With the increasing prevalence of remote work, expenses related to home offices, internet connections, and ergonomic equipment have become more important. Ensuring fair taxation for such benefits has become a challenge and HMRC expenses rules have not kept pace with the hybrid employee.

Environmental considerations: As society becomes more environmentally conscious, company cars and their associated benefits need to be scrutinised for their impact on carbon emissions and sustainability.

Adapting to the 21st Century

To make PAYE, expenses and benefits work effectively in the 21st century, several adjustments are necessary:

Technology and Digitalisation: Embrace technology for efficient tax collection and reporting. Digital platforms can help streamline PAYE and make it easier for gig workers and others to manage their tax obligations.

Flexibility: Create tax policies that accommodate the diverse work arrangements of the modern era, ensuring that tax deductions are fair and straightforward.

Transparency: Make tax policies and regulations clear and accessible to all taxpayers, regardless of their employment status or industry. Look at greater alignment across tax and national insurance and what might be trivial in nature.

Environmental Considerations: Integrate sustainability factors into the assessment of benefits like company cars, promoting eco-friendly choices.

Wellbeing: Look at what is available to the employee and what is tax exempt; making sure that the treatment for tax and national insurance is aligned. Areas like increasing the medical treatment exemption for those on longer term sick from £500 to £1,000, or HMRC could look at the workplace gym exemption and extend it to the gym that is open to the public.

Conclusion

The 21st century has brought about significant changes in the way we work and receive benefits from employers. To ensure that the UK’s PAYE, expenses, and benefits systems remain effective, they must adapt to these changes. This involves leveraging technology, accommodating the gig economy, and promoting transparency and sustainability. With greater alignment across tax and national insurance and a new look at the trivial benefit, employers will have more options to reward and retain their employees. From it will emerge a new PAYE system, fit for the 21^st Century!

PKF Francis Clark

Our specialist Employer Solutions team are here to help with all aspects of employment tax, benefit and reward. Please do get in touch with the team for more advice and guidance.