HM Revenue and Customs (HMRC) is considering proposals that would see the tax authority given the power to calculate and deduct PAYE taxes centrally.

The proposal, which formed part of the recently completed consultation on reforms to the PAYE system, would require employers to supply HMRC with 'real time' information about employees' incomes and tax and NIC deductions at the time of payment rather than once a year as is the present case.

HMRC would hold the information in a consolidated real time tax account for each individual employee, along with details of their personal tax allowances and other reliefs that may be owing them.

The tax authority would also set in place a central calculator on which would be worked out the appropriate tax deductions, national insurance contributions and student loan repayments.

The plan, according to HMRC, would mean that the right amount of individual tax could be calculated "in almost all situations" and would "reduce error and confusion caused by tax codes". It would also save employers some £500m a year in admin costs, HMRC estimated.

The HMRC paper said: "Under Centralised Deductions, the employer would send the gross payment through the electronic payment system to a central calculator where the deductions calculated by HMRC would be made automatically. The resulting net payment would then be sent to the individual [employee's] bank account and the deductions would be paid directly to the government."

The current regime sees employers working out employees' tax liabilities according to their earnings from a particular job. If someone gets income from more than one source, such as a worker with extra part-time employment, HMRC will reconcile the information it holds on each taxpayer to make sure that the correct amount of tax has been paid.

The reconciliation usually takes place at the end of the tax year, but HMRC has conceded that such is the level of work involved that a significant backlog of unresolved cases has accumulated, going back as far as six years.

HMRC emphasised that, under the plans, it would not have direct access to any money or information contained in individual taxpayers' bank accounts.

The report said: "The system would adhere to the high standards of taxpayer confidentiality that characterise the existing system."

A HMRC spokesman added: "These are not proposals; they are ideas intended to get a discussion going about what could be done to improve PAYE.

"It is for Treasury ministers to decide about any possible changes. The government is committed to making PAYE better serve all taxpayers. The discussion document is designed to start a conversation about as many ideas as possible. The centralised deductions concept is not about wages being centrally administered by HMRC or any other agency."

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