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Income Tax (Earnings and Pensions) Act 2003


2722.Deductions from pay by employers have been part of the income tax system for a very long time. For example in 1803 tax on emoluments from public offices and employments of profit was actually assessed on the employer. The employer was, however, entitled to deduct it from the salary. But the real history of PAYE as such starts in the Second World War.

2723.At the start of the war, manual workers and many other employees paid tax direct to the collector at half-yearly intervals. Manual workers were permitted to spread the payments over 13 weeks by buying “income tax stamps”. But employers were not involved in this system.

2724.The war saw a big increase in both the number of employees paying tax and in the rates of tax. Many found this hard. This led to the introduction in F(No. 2)A 1940 of arrangements for employers to deduct Schedule E tax from pay. These arrangements were widened in 1942 to any weekly wage-earners. But they were nothing like PAYE. The tax was still assessed every six months by the Inland Revenue. The Inland Revenue then told employers how much to deduct.

2725.This left a lot of problems. Payment lagged on average some ten months behind earnings. So tax due on high earnings (for example when doing a lot of overtime) could end up being deducted when earnings were low. Changes of job (from higher to lower earnings) were another obvious source of difficulties. All this led to a search for a system of deductions from “current earnings”. And one which did not deduct too much – leaving perhaps millions of people to have less to live on while they waited for a repayment after the end of the year.

2726.These problems were discussed in a White Paper in 1942 (Cmd. 6348). That favoured sticking with pretty much the system of deductions in arrears despite its problems. But the reactions to that White Paper (and the fact that both the USA and Canada had come up with systems of deduction based on current earnings) led to a change of views. Another White Paper in 1943 (Cmd. 6469) proposed what is recognisably the current PAYE system. Crucially it involved deductions based on the cumulative pay and tax deducted in the year. (This is still the feature which distinguishes PAYE in the United Kingdom from most other countries’ PAYE system. All major developed countries other than France have some system of deduction of tax by employers from wages and salaries. That in the United Kingdom is at the far end of the spectrum in requiring cumulative calculations and in the sophistication of its codes and procedures for trying to keep codes up to date.)

2727.The system was proposed only for weekly-wage earners and pensions paid by their former employers. But the legislation introduced in 1943 was extended, in response to representations, during the passage of the Bill to others earning less than £600 a year. It was enacted as the Income Tax (Employments) Act 1943 (6&7 Geo. 6. (1942-43) c.45). The core provisions of the 1943 Act are recognisably the source of the current PAYE vires in section 203 of ICTA:

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