Tax liabilities are currently calculated by employers, but a discussion paper circulated by HMRC would give it the power to calculate and deduct tax centrally

HM Revenue & Customs has defended proposals that it should have the power to calculate and deduct tax centrally, claiming such a move could produce correct PAYE calculations in "almost all situations".

The idea, included in a discussion paper on improving the operation of PAYE, would require employers to provide HMRC with "real time" information about income and deductions for each employee. It would hold this information in a consolidated real time tax account for each individual, including details of their personal tax allowances and other reliefs that may be due.

HMRC would also construct a central calculator to work out the correct deductions of tax, national insurance contributions and, if appropriate, student loan repayments.

The paper says: "Under Centralised Deductions the employer would send the gross payment through the electronic payment system to a central calculator where the deductions calculated by HMRC would be made automatically. The resulting net payment would then be sent to the individual's bank account and the deductions would be paid directly to the Government."

Currently, employers calculate their employees' tax liability based on the income they earn in that particular job. Should someone receive income from more than one source – an employee doing several part-time jobs or a pensioner receiving a couple of pensions and investment income, for example – HMRC later reconciles the information it has received about an individual's earning to check that he or she has paid the correct amount of tax.

This should normally take place soon after the end of the relevant tax year, but HMRC has admitted in the past two weeks that it has fallen behind with such reconciliations, building up a backlog of at least six years.

The proposal stressed that at no stage would HMRC or its agents have direct access to any money or information contained in a taxpayer's bank account. "The system would adhere to the high standards of taxpayer confidentiality that characterise the existing system," it said.

A spokesman for HMRC said no decisions have been made about the future of PAYE. "These are not proposals, they are ideas intended to get a discussion going about what could be done to improve PAYE.

"It is for Treasury ministers to decide about any possible changes. The government is committed to making PAYE better serve all taxpayers. The discussion document is designed to start a conversation and debate about as many ideas as possible. The centralised deductions concept is not about wages being centrally administered by HMRC or any other agency."

The discussion paper has caused horror in some quarters. Matthew Sinclair, director of the Taxpayers' Alliance said: "It is an absolute disaster waiting to happen. It would actually reduce transparency of the tax that people pay because they wouldn't get a monthly payslip."

He added that the document suggested people could instead look up how much tax they had paid online – something which he believed would lead to a reduction in people checking their taxation so fewer mistakes would be detected. "They would also have to make some sort of arrangement for those who don't have internet access," he added.

But John Whiting, tax policy director for the Chartered Institute of Taxation, said the discussion paper is a curate's egg: "You can see the idea of the HMRC effectively running the whole of the payroll systems is a non-runner, quite frankly.

"But we should talk about how some of the more desirable aspects [of the idea] – the centralisation of information by the Revenue, axing of paper work and the reduction of the burden on employers – could be brought froward. If they had been in place the problems we are now seeing in tax coding would probably not have happened."