HM Revenue & Customs is ordering companies to buy or update payroll software to cope with the impending introduction of Real Time Information (RTI) reporting.

From this week all employers will receive a letter from HMRC telling them what they need to do to get ready for the introduction in April of RTI, the "biggest reform of business tax reporting in 70 years".

Under RTI every employer in the country will move to a new way of reporting tax and national insurance deductions from employees’ wages and salaries. This updates the PAYE system so that it is "quicker, easier and more accurate", HMRC said.

HMRC claims savings to business will total £300 million in reduced administration costs once the system is up and running. Employers will benefit from "much simpler" requirements for reporting to HMRC, and from the abolition of the extensive annual tax return that the old system required.

Employees, particularly the million people in the UK who have multiple jobs, will "benefit" from HMRC getting details of their tax every time that their wages are paid, rather than just once a year. This will make HMRC’s records more accurate, up-to-date and will begin to reduce the number of cases where someone is found to have under or overpaid tax during the year.

"Britain will benefit from HMRC getting the right tax in on time, receiving the £3 billion that is currently not paid until the end of the year,” said HMRC.

The government's planned introduction of the Universal Credit system will be underpinned by RTI, "ensuring it always pays to work and the system is responsive to individuals’ changing circumstances", HMRC added.

HMRC said RTI will increase the accuracy of HMRC’s information about tax credits claimants, enabling better detection of fraud and error in the system and potentially saving the UK hundreds of millions of pounds.

According to the parliamentary Public Accounts Committee (PAC) last year, the government's planned Universal Credit system will make it very difficult for small firms and the self-employed to keep up on the technology front.

In a report on means tested benefits and the effect of the Universal Credit plan, the PAC said small firms "will find it hard" to integrate with new systems.

HMRC chief executive Lin Homer said: “RTI delivers on all fronts. Business costs will be cut by £300 million a year, employees will be taxed more accurately and fraud and error in the tax credit system will be reduced by hundreds of millions of pounds every year."

Small businesses can download free software to help them get ready for the new system in April. HMRC is offering free software for employers with nine or fewer employees.

The HMRC website has information about RTI, including how to prepare, payroll software options and tips.