What is a PAYE Settlement Agreement (PSA) and how does it work?

When employers begin reviewing benefits and expenses, questions about PAYE Settlement Agreements (PSAs) often arise. Much like HMRC’s strict stance on benefit in kind rules, PSAs operate within a clear framework – very helpful when used correctly, but not always as flexible as many hope and often quite expensive.

What is a PAYE Settlement Agreement?

A PAYE Settlement Agreement (PSA) is an arrangement with HMRC that allows employers to settle the tax and National Insurance due on certain benefits in one annual payment, instead of processing them through payroll or on P11Ds. These benefits must be minor, irregular, or impracticable to attribute to individuals.

The employer pays both the tax and Class 1B NIC, meaning employees aren’t personally taxed on these items. This is particularly useful for those perks that don’t fit neatly into existing reporting rules.

For many employers, this means a PSA provides a simplified administration process as well as  a better employee experience, as there are no unexpected tax bills on tokens of appreciation.

To be eligible, a benefit must fall into one of HMRC’s categories. Typical examples include:

Minor: incidental expenses whilst travelling for business which are over the daily limit, or small gifts and vouchers not covered by the trivial benefit exemption.

Irregular: one-off benefits and expenses such as the cost to attend an overseas conference, or relocation expenses higher than the £8,000 exemption limit.

Impracticable: benefits where it is difficult to assign amounts to individuals, such as a staff party that is over the £150 per head exemption.

Some benefits must stay firmly outside a PSA – high value benefits like company cars and any cash payments are specifically excluded.

How do you get a PSA?

The process for getting a PSA is relatively straightforward but time-sensitive, as an application must be made and approved by HMRC no later than 5 July after the tax year ends. Failure to meet this deadline means that any P11D submissions made which exclude benefits intended to be reported on a PSA for the year are incorrect.

In the application, you must define the benefit categories to be included. Broad descriptions help avoid annual updates to your agreement (for example, “staff entertaining”).

Once the contract is in place, you must maintain a record of benefits and expenses that will be included on the PSA, including the value of the benefit, which employees received it, and their income tax rate bands. These records are then used to calculate the tax and NIC due, with the calculations submitted to HMRC by 31 July following the end of the tax year.

The payment deadline is 19 October (or 22 October for electronic payments).

How can we help?

We can assist with applying for a PSA and completing the calculations. We can also help you plan ahead to ensure you are making the best use of exemptions before using a PSA, minimising the amount of tax paid.

If anything in this article has made you worry your reporting may have gone wrong in the past, we can also help you make disclosures to HMRC to get your compliance back on track.

If you want to discuss the benefits and costs of having a PSA in place, please get in touch with your usual contact.

Tessa Brown