PAYE Settlement Agreements

In general terms, benefits provided to employees by their employer will result in the employees having to pay tax on the benefit and also potentially National Insurance Contributions (NIC), depending on the nature of the benefit provided.

However, some employers may decide that they do not want their employees to suffer this additional cost, particularly if the benefit was provided as a reward or incentive. In this instance, the employer would need to settle the tax and NIC liability with HMRC via a PAYE settlement agreement (PSA).

What is a PSA?

A PSA is an agreement an employer can enter into with HMRC in order to pay the tax and national insurance liability on certain small or irregular benefits in kind and expenses provided to employees.

What can or cannot be included in a PSA

Items that can be included within a PSA need to fall within one of the following categories:

• Minor benefits or expenses, such as incentive awards, subscriptions or small gifts which do not satisfy the trivial benefit exemption;
• Sums paid on an irregular basis, such as relocation expenses exceeding the exemption limit or a holiday as a gift/reward to an employee; or
• Where it is impractical to apply PAYE or it is not easy to apportion the value of the benefit, where it is shared by several employees, e.g. staff entertaining.

Items that cannot be included within a PSA would be cash payments such as wages or round-sum allowances or high-value benefits such as company cars or beneficial loans.

How to apply for a PSA

To apply for a PSA, the employer needs to write to HMRC detailing the items that they would like to include.  Applications must be made and agreed by 5 July following the end of the tax year in which the benefits or expenses have been provided.

If HMRC agree the application, they will send the employer two copies of form P626, both of which need to be signed by the employer and returned to HMRC who will then authorise the application and return one of the P626 forms to the employer to retain. The authorised copy of form P626 is the employer’s proof that the PSA is in place.

Since the 2018-19 tax year there is no longer a requirement to apply for the PSA on an annual basis in order for the agreement to continue.  Once authorised, the PSA will stay in place for subsequent tax years unless it is varied or cancelled by either the employer or HMRC.

Calculating the liability due

HMRC provide a tool to perform the calculation and prepare form PSA1 (the PSA calculation form).

Each year the employer needs to provide HMRC with a copy of their PSA1 detailing the tax and Class 1B NIC arising from the items included within the PSA.  This calculation needs to be with HMRC by 31 July.

Once the calculation has been agreed by HMRC they will confirm the amount with the employer and provide the employer with a payment slip which should be used to pay the amount due.

The payment slip will have a specific reference number relating to the PSA, which is also quoted on the PSA confirmation letter from HMRC. It is important to remember to use the PSA reference number and not the PAYE Account Office number. If the PAYE Account Office number is used the payment will be allocated against the normal PAYE account and not the PSA, meaning HMRC will still look to pursue the employer for the PSA liability even though it has been paid.

How is payment made?

The PSA needs to be paid by the due date of 19 October, if paying by post, or by the due date of 22 October if paying electronically. Therefore, for a PSA in place for the 2021-22 tax year the amount will need to be paid to HMRC by 19 or 22 October 2022.

Penalties and interest can be charged if the PSA is not paid by the due date.

Summary

A PSA can be an effective simplification process regarding the expenses and benefits procedures. It can help reduce an employer’s administrative burden on reporting details to HMRC and generate goodwill with employees, as the employer settles the tax and NIC on certain expenses and benefits otherwise taxable on the employees.