Weekend Money: It's so long, IR5

The annual return will soon be a thing of the past for many taxpayers. Few will mourn its demise, but it may still pay to work out your tax for yourself writes personal finance editor MARK FRYER.

It's that time of year again. No, not winter. Something much more depressing - tax return time. But the tax packs which have been slithering into mailboxes lately may be the last you'll ever see. Farewell box 15B, so long to subtracting 25H from 25G (or is it the other way around?).

A new system that Inland Revenue calls "the most far-reaching changes to the tax system since the introduction of PAYE in 1958" will mean the 1.2 million or so taxpayers who now fill in an IR5 return every year will never have to do so again.

The changes came into effect on April 1, the start of the 2000 tax year. That means IR5 taxpayers still have one last form to fill out - the one for 1998-99. Most of us, in fact, won't notice much difference until this time next year, when we're no longer confronted with a blank return.

And there will be virtually no change for provisional taxpayers or those who get money from rents, cash jobs, self-employment and so on, who will still have to keep filing an annual IR3 form.

The new system has already run into criticism from some employers, but what does it mean for the rest of us?

"This is all about getting the IRD out of people's lives and I think that has to be good," says John Shewan, a tax partner with PricewaterhouseCoopers. There are bound to be some teething problems, he says, and lots of confusion come tax time next year, but in a few years we'll have forgotten what the fuss was about.

For many of us, the changes mean an end to the annual squaring-up exercise, when we work out our income for the past year, calculate the tax we've already paid, then ask for a refund, or promise to send the IRD a cheque for the tax we owe.

Inland Revenue believes the art of tax extraction is now precise enough that - for many of us - it can be sure of charging the correct amount, leaving no need for a tidy-up at year's end.

Every month, employers will have to send the IRD a list of all their employees, their tax numbers, tax codes, how much they earned and various other information, such as child support or student loan deductions.

So long as the right information is supplied, wage and salary earners should end up paying precisely the right tax.

The department says the only people who will be required to adjust their tax at the end of the year will be those who have student loans, are liable for child support or get family assistance [and not always in those cases, either]. However, many other taxpayers would be well-advised to check their calculations [see "taxing questions" below].

While the prospect of never setting eyes on another tax return has an undeniable appeal, it does mean it will be harder to know if you're paying too much. If out of sight means out of mind, some taxpayers may miss out on refunds they would have noticed if they were forced to file a return.

The new system relies on each taxpayer choosing correctly from a new set of tax codes, so they're taxed at the right rate.

Many employees have already had their code changed automatically, or will have been asked to fill in a form choosing one of the new codes.

That code may have to be changed during the year, and it will be your responsibility to get it right, although the IRD says it will monitor things throughout the year and advise taxpayers who appear to have their code wrong.

And, just in case you were wondering, the fact that you don't have to file a return doesn't mean the only income you need to worry about is the income that IRD knows about. As always, you're still legally required to report any income that hasn't been taxed at the source.