HM Revenue and Customs (HMRC) has confirmed that it will be going ahead with a major reform of the PAYE system.
The overhaul will involve a switch to a real time information system.
The new system will mean that employers must supply HMRC with details, such as income tax, national insurance contributions and student loan payments, on each payroll day rather than at the end of the year.
HMRC said that the change would bring several benefits. These include making it easier to ensure individuals pay the right tax after a change of job and removing the need for the P45/P46 process over time.
There would be a simplification of the PAYE end of year reconciliation process for employers, and much of the uncertainty that leads to errors in the tax credits system would be lifted.
Following a period of consultation, HMRC said that it is to embark on a pilot scheme in April 2012, involving volunteer employers and software developers.
Work to ensure data quality will begin in October 2011 and continue until all employers have moved to the new system.
Once the pilot scheme has been successfully completed, the plan is that employers will be expected to start using the real time information system from April 2013. It will become mandatory by October 2013.
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."
Stephen Banyard of HMRC added: "We wanted people who use the system every day to give us their views on the collection of Real Time Information. We have listened to the concerns of payroll providers and employers surrounding the proposed mandation date and amended our plans to take these into account.
"We want to work with software developers and employers to help us deliver the new system. I urge anyone interested in being involved in the pilot to contact us."