A PAYE Settlement Agreement (PSA) is an arrangement with HM Revenue and Customs (HMRC) that allows employers to settle certain types of tax and National Insurance contributions (NICs) liabilities on behalf of their employees. This can be particularly beneficial for covering liabilities on benefits that are minor, irregular, or impractical to tax through the payroll.
Below we have set out a guide on how PSAs work, their benefits, and the process involved.
A PSA is a voluntary agreement enabling employers to make a single annual payment to cover the tax and NICs on specific expenses and benefits provided to employees. This often simplifies the process for both the employer and employees, ensuring that employees do not have to worry about the tax implications of smaller benefits and expenses
1. Simplification – PSAs simplify the tax process by consolidating multiple tax liabilities into a single annual payment.
2. Employee Satisfaction – Employees benefit as they do not have to deal with the tax implications of the covered expenses and benefits.
3. Administrative Ease – A PAYE Settlement Agreement (PSA) is an arrangement with HM Revenue and Customs (HMRC) that allows employers to settle certain types of tax and National Insurance contributions (NICs) liabilities on behalf of their employees reduces the administrative burden for employers, who would otherwise have to report these expenses and benefits through P11Ds or the payroll.
Not all expenses and benefits can be included in a PSA. The types that are generally covered fall into three categories:
1. Minor Items – Such as small gifts, staff entertaining, or non-cash vouchers.
2. Irregular Items – Such as one-off relocation expenses that exceed the tax-free limit.
3. Impractical Items – Such as shared benefits, where it is difficult to attribute the exact cost to individual employees.
To set up a PSA, these are the steps that must be followed:
1. Application to HMRC – Employers need to apply to HMRC to set up a PSA. This should be done in writing to HMRC with details of the benefits and expenses you wish to be covered.
2. Agreement – Once HMRC agrees, they will send a PSA agreement form for the employer to sign and return.
3. Annual Calculation – Each year, the employer must calculate the total value of the benefits and expenses included in the PSA, determine the tax and NICs due, and make a single payment.
The calculation of the tax and NICs for a PSA involves several steps:
1. Grossing Up – Since the employer is covering the tax, the benefits and expenses need to be grossed up to reflect the tax that would have been payable by the employee.
2. Tax Calculation – Apply the appropriate tax rates for each individual to the grossed-up amounts.
3. NICs Calculation – Class 1B NICs are payable on the grossed-up value of the benefits and expenses.
Employers must apply for a PSA by 5 July following the end of the tax year in which the benefits and expenses were provided.
The payment of tax and NICs under a PSA must be made by 22 October (or 19 October if paying by cheque – yes, cheques do still exist!) following the tax year to which it relates.
Once a PSA is in place, it typically continues until either the employer or HMRC cancels it. Employers must review and renew the agreement annually, ensuring it still accurately reflects the benefits and expenses being provided.
A PAYE Settlement Agreement can be a valuable tool for employers who wish to provide benefits to their employees but don’t wish for the employees to be adversely effected by having to pay tax on the value of the benefits provided.
By understanding the process, benefits, and compliance requirements, employers can effectively manage their tax obligations under a PSA. If you would like further guidance please do get in touch.
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