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 PSA?

Many businesses will provide certain benefits to their employees that are intended to motivate or incentivise them, such as staff entertaining, gifts and prizes and even relocation packages. Whilst there are exemptions available - and use of these should be considered - many benefits remain liable to 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 forms P11D or include them in the payroll.

How does PSA work?

Firstly, if you do not already have a PSA contract in place with HMRC, you need to have one agreed and put in place by 6 July following the end of the tax year for which you provided these benefits. This contract will include 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 because you decide to add in a taxable team lunch not specifically identified). The contract will no longer need to be applied for each year unless you need to add new items.

Once agreed, 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 exemptions where possible for items such as annual functions, workplace meals, trivial benefits and Long Service Awards. Including items that are covered by an exemption means that you would be paying tax and NIC unnecessarily. But it is also important to ensure that any conditions for certain exemptions are met.

Finally, payment of the liabilities arising will need to be made to HMRC by 19 October (22^nd October for electronic payment) following the year to which they relate.

If you are seeking to agree a PSA with HMRC 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 included?

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?

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. 

How do I calculate the amount due?

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
• 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.