Preparing for Mandatory Payrolling: Is a PSA Right for Your Business?

Many businesses provide employees with occasional benefits, such as gifts, staff entertaining, annual events or employee rewards. While these benefits can be valuable for employee engagement, they can create tax and national insurance reporting obligations. 

One way to simplify the process is through a PAYE Settlement Agreement (PSA). A PSA is an agreement with HMRC which allows an employer to settle the tax and national insurance due on certain employee benefits.

A PSA can be beneficial for both employers and employees as staff receive the benefit without facing an unexpected tax charge, and employers reduce the administrative burden of reporting the benefits individually through the payroll or on forms P11D.  

Under a PSA, the employer pays the tax and national insurance due on qualifying benefits directly to HMRC, so employees do not have to pay the tax on the benefits themselves. 

But because the employer is paying the tax on the employee’s behalf, tax is calculated using the employee’s marginal tax rate and then is grossed up, meaning the total cost is often higher than the value of the original benefit. 

Why is this becoming more important?

HMRC are now moving towards mandatory payrolling of benefits, meaning that employers will increasingly need to identify and report taxable benefits in real time. 

As a result, PSAs may become an even more valuable tool for managing qualifying benefits efficiently.

Where benefits qualify for inclusion in a PSA, employers can avoid employee-level reporting and payroll adjustments altogether, making PSAs an increasingly valuable tool for keeping things simple. 

If you would like advice on whether a PSA could benefit your business, or assistance reviewing an existing agreement, please contact our employment tax team.

Alanah Webb | Assistant Manager in our Business South team | Based in Ipswich, Suffolk