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HM Revenue & Customs is set to pilot a controversial real time Pay As You Earn (PAYE) tax system with employers from April 2012, in an attempt to make its databases more accurate.

HM Revenue & Customs is set to pilot a controversial real time Pay As You Earn (PAYE) tax system with employers from April 2012, in an attempt to make its  databases more accurate.

Last year, millions of taxpayers found they had paid too little or too much tax, and were either issued with new bills because they had underpaid or issued with refunds as a result of overpayments. There were also concerns that HMRC had misplaced taxpayers' national insurance contributions.

Many of the problems were caused by out-of-date tax codes as a result of taxpayers moving jobs or employers not filling out paperwork correctly. The new Real Time Information (RTI) system to be trialled will see employers report tax and NICs deductions at the same time as they pay their employees, rather than at the year end.

The pilot from April 2012 will involve volunteer employers and software developers. Subject to successful completion of the pilot, employers will be required to start using the RTI system from April 2013, and all employers will be using the RTI system by October 2013, said HMRC.

David Gauke, exchequer secretary to the Treasury, said: "Real Time Information will support improvements to the PAYE system making it more accurate for taxpayers and easier for employers and HMRC to administer. We need a PAYE system that can meet the demands of the 21st century workplace and ensure that the tax system works better."

Over time, said HMRC, the RTI system will remove the need for the P45/P46 document process, used when taxpayers leave jobs, start jobs and being issued with a document showing what they earnt in a past year.

Last year, the Freelancer & Contractor Services Association warned that RTI would potentially create “huge amounts of additional information” that HMRC would have to process. The Association also questioned the level of data security HMRC would be able to provide under the new system.