A PAYE Settlement Agreement (PSA) enables employers to make a single annual payment to HMRC to settle all income tax and NIC due on certain expenses and benefits provided to employees. It can significantly reduce administration, help with compliance, and mitigate the risk of reducing the intended motivation of employees when they may otherwise see a tax liability. Should you have a PSA?

What is a PAYE Settlement Agreement (PSA)?

Many businesses will provide benefits to their employees, such as staff entertaining, gifts and even relocation packages. Although there are exemptions, many benefits are liable for income tax and NIC. 

PSAs are an administrative arrangement allowing employers to pay the income tax and NIC on behalf of their employees on certain items, rather than return them as benefits in kind on P11D  forms or include them in the payroll.

How does a PAYE Settlement Agreement work?

If you don’t already have a PSA contract in place, you need to have one agreed with HMRC and put in place by 6 July following the end of the tax year for which you provided the benefits. 

This contract will define the nature of benefits to be included. Keep descriptions relatively wide to avoid the need to regularly update them - for example, “staff entertaining” would cover items such as parties, taxable away days, social events, etc and would not need to be updated if you decide to add in other taxable staff events. 

You will not need to apply for a new PSA each year unless you need to add new items.

Once a PAYE Settlement Agreement is made, you will need to provide computations of the tax and NIC due, separating the computations out for Scottish, Welsh and rest of UK employees.

It is important to ensure that you have used standard exemptions where possible for items such as annual functions, workplace meals, trivial benefits and Long Service Awards. Including items on your PSA that are covered by an existing exemption means that you would be paying tax and NIC unnecessarily. 
Finally, you will need to make payment for the liabilities arising to HMRC by 19 October (22nd October for electronic payment) following the year to which they relate.

If you are seeking to agree a PSA for the first time, HMRC’s preferred process is an online application. If this is not possible then a postal application can be made.

What can be in a PAYE Settlement Agreement?

The expenses or benefits to be included must be “minor”, “irregular” or “impracticable” to operate PAYE on the item:

• Minor – there is no pre-determined limit to the value, but it might include items such as gifts and vouchers to mark good work, or small gifts not covered by the trivial benefits rules
• Irregular – this includes items not paid at regular intervals over the course of a tax year. It might include, for example, relocation expenses not covered by the £8,000 limit
• Impracticable – items where it would be difficult to allocate a value to individual employees would fall into this category. This would typically include the costs of a staff entertaining event for a number of employees.

What can’t be included in a PSA?

HMRC won’t include items such as cash payments, including round sum allowances, both of which should be subject to PAYE and NIC through the payroll, or large, regular benefits such as company cars or medical insurance which should be reported on form P11D, or taxed via payrolling benefits in kind. 

PAYE Settlement Agreement examples 

Annual Events 

Seasonal events provided annually for your employees for e.g., summer family days or Christmas parties can be a welcomed tax-exempt benefit provided careful planning is taken. Be mindful to keep total costs for annual events below £125 plus VAT per employee to make full use of the exemption available. 

Away Days 

Typically, away days are not a taxable benefit if they are correctly structured as a training event. Examples like management away days, motivational team building, or personal development events could give rise to a taxable benefit. 

Staff Entertaining 

Staff-only entertaining events are taxable and cover a wide range of events. These can be meals or drinks for a team at a local eatery, tickets to a theatre or sporting event provided as a reward or incentive. 

PAYE Settlement Agreement calculations

You will need the following details to calculate the income tax/NIC due:

• The value of benefits/expenses provided for each PSA category agreed with HMRC
• The number of employees who received each benefit / expense
• The number of employees across each income tax rate band (including Scottish and Welsh rates where appropriate)
• The value of the benefits/expenses provided to employees in each different income tax rate band.

PAYE Settlement Agreement penalties 

If your calculations are submitted, but delay payment, it is likely that HMRC will levy interest on the late payment. They may also raise formal determinations, and start enforcement action to recover the liability, in the same way as a late payment of monthly PAYE and NIC. 

If your computation is not submitted on time, HMRC may revoke your PSA completely. This in turn can lead to formal assessments, increased liabilities and penalties. As an example, if we assume that a company had proposed to settle the tax on £1,000 of store vouchers provided to Basic Rate taxpayers, the cost via a PSA would have been £422, but the minimum cost via a Class 6 Settlement with HMRC would be £522, plus interest and penalties - in other words, a 25% uplift in the cost.  

Top Tips for handling your PAYE Settlement Agreements

• PSAs are better than grossing up through payroll. Though it may be tempting to ‘gross up’ a voucher via payroll, this will incur a greater cost for your company and possibly have adverse implications for your employee
• Make sure you have time to review the costs to be included. The marginal tax rate for costs included within a PSA is around 90% for higher rate tax payers – it is critical that you include all appropriate costs, but do not include costs that are covered by an exemption 
• Accurate coding is critical. By ensuring that you have full details of the costs, you are best placed to determine whether a cost is taxable
• Plan your budget. One voucher at Christmas for £100 will be taxable – can you use your budget more wisely to reduce the tax burden?
• Remember you may have 3 computations to do. HMRC require separated computations for England and Northern Ireland; Scotland and Wales, and the rates for Scotland are different
• Talk to us. We have been assisting clients for many years and have deep expertise in this area to provide the best possible outcome for your business.