How PAYE, RTI and Universal Credit work
The UK tax authorities runs a wage calculation and tax deduction system (Pay as you Earn — PAYE) that requires every employer to run a PAYE scheme. Every pay period (usually weekly or monthly) each employer, reports employee wages to the tax authorities, calculates the Income Tax and National Insurance deductions, and pays over the deductions directly to HMRC — the UK’s tax collection authority.
Every record is linked to an individual’s National Insurance number. This number is issued to all workers eligible to work in the United Kingdom and records the payment history of an individual over their lifetime. The record is currently used to assess eligibility for the UK state retirement pension.
Recent changes to the PAYE system introduced a system known as Real Time Information (RTI) that extended the information reported to include an indication of the amount of hours an employee had worked during the reporting period, as well as a legal requirement on the employer to send that information in before the end of the period, and to send it in electronically.
This timesheet information is linked through to the Department of Work and Pension’s (DWP) Universal Credit system — the new system of paying social security payments to individuals — so that the right amount of top up Universal Credit can be paid to those eligible.
Universal Credit is replacing working tax credit, child tax credit, housing benefit (except for specified accommodation), income support, income-related employment and support allowance and income-based jobseeker’s allowance and is slowly being rolled out across the UK.
Every week or month an electronic message is sent by every employer to HMRC detailing who the employer is, how much an individual has been paid, what their tax deductions are, and an indication of how many hours they have worked in that period.
That information is relayed to the DWP for every individual eligible for Universal Credit, and the DWP makes a direct to bank account payment once a month that tops up the wages with the appropriate Universal Credit payment.
How the UK Job Guarantee Wage gets paid
Extending this scheme to support the Job Guarantee is straightforward. Instead of reporting hours bands to HMRC, Job Guarantee eligible employers would have the option of reporting the precise amount of hours worked, and setting the Taxable Pay field to zero.
That message is relayed across to DWP and the Universal Credit system makes a wage payment to the individual according to the reported hours at the living wage.
So if the living wage is £10 per hour and the individual works a full 37.5 hour week, then they would be paid a wage by the Universal credit system of £375 per week, or £1625 per month. This is considerably more than the current Universal Credit stipend which is as low as £58 per week or £250 per month and represents a step change in the income of the poorest people in the land.