PAYE Settlement Agreements – Key information for employers to know 

A PAYE Settlement Agreement (PSA) enables the employer to pay the tax and National Insurance instead of the employee on those benefits and expenses included within the PSA.

This can be useful to preserve the beneficial nature of the benefit. For example, in respect of a Christmas or other function falling outside the associated exemption, or where the effort involved in reporting the benefit on individual employees’ P11Ds is disproportionate to the amount involved.

What is a PAYE Settlement Agreement for?

A PSA is suitable for benefits which fall into one of the following three categories:

  • minor benefits and expenses – such as telephone bills, incentive awards outside the scope of the exemption and similar
  • irregular items – such as relocation expenses or the occasional use of a company flat
  • impracticable expenses – staff entertainment or shared cars

A PSA is not suitable for cash payments or for high-value items such as company cars.

Items falling within the scope of the trivial benefits exemption can simply be ignored for tax and National Insurance purposes. They do not need to be included in a PSA.

Setting up and checking a PSA

To set up a new PSA, the employer should write to HMRC setting out the benefits and expenses to be included within the PSA. Once HMRC have agreed the PSA, they will send two draft copies of form P626. Sign both copies and return them to HMRC. HMRC will authorise the PSA and send a form back – this will form the PSA.

A new PSA must be agreed by 6 July following the end of the tax year for which it is to take effect.

A PSA is an enduring agreement. Once it is set up it will remain in place until either the employer or HMRC revokes it. Employers should check that any existing PSAs remain valid.

Impact of a PSA

Where a PSA is in place, the employee does not pay tax on any benefits included within the PSA. Instead, the employer meets the liability on the employee’s behalf. Also, there is no need to report benefits included in the PSA on the employee’s P11D, or to payroll them.

Instead, the employer pays tax on the items included within the PSA grossed up at the employees’ marginal rates of tax. Scottish taxpayers should use the relevant Scottish rate of income tax in the calculation.

What about National Insurance? Class 1B contributions, which are employer-only contributions are payable at a rate of 13.8% in place of the Class 1 or Class 1A liability that would otherwise arise. Class 1B contributions are also due on the tax paid under the PSA. This is because the tax paid on behalf of employees is also a taxable benefit.

Settling the PAYE Settlement Agreement

Use Form PSA1 to calculate the amount of tax and Class 1B National Insurance due under the PSA. Send this to HMRC after the end of the tax year. The tax and Class 1B National Insurance must be paid by 22 October after the end of the tax year where payment is made electronically. Where payment is made by cheque, it must be paid by the earlier date of 19 October.

Next steps

The PSA return is in theory relatively straightforward. However, identifying what costs are subject to tax and NICs and which need to be included in a PAYE Settlement Agreement can be more complex. This is particularly true following the recent introduction of the trivial benefit exemption. Our team at Countplus can help you with all aspects.

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