PAYE Settlement Agreements

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PSAs can benefit both employer and employee

What is a PAYE Settlement Agreement (PSA)?

A PSA is an annual agreement made with HMRC whereby employers can settle certain tax liabilities on behalf of their employees.

It cannot be used for major benefits such as cars or medical insurance, but is a way of dealing with smaller taxable benefits that would otherwise have to be returned on forms P11D and the employees taxed accordingly.

How it works

The employer notifies HMRC of the benefits to be included in a PSA. HMRC will issue two copies of a contract. The employer signs and returns these to HMRC no later than 5 July following the end of the tax year in question. Once agreed, the employer will calculate the tax and NICs on the total cost of all events (this has to be done on a grossed up basis) and send details to HMRC. A payslip will be issued to settle the liability by 19 October.

The PSA contract is renewed annually.

Example of a PSA

A typical benefit included in a PSA: staff entertainment
The employer arranges for staff drinks to celebrate the business achieving a sales target. As this is staff entertaining, the costs are taxable on the employees. The employer does not want them to suffer tax on this and would prefer to settle the tax liability on their behalf. An approach to HMRC for a PSA will address the matter.

Positive impacts of a PSA

  • Maintaining good staff morale: the employees will not suffer tax on the benefit.
  • Cashflow: the tax and NICs do not have to be paid until the 19 October of the following tax year (for example, the tax and NICs due in respect of an event held in July 2016 will not be due until 19 October 2017).
  • The tax and NICs paid by the employer can be set against the employer’s taxable profits.
  • The employer will have to pay tax on the value of the grossed up benefit, as well as NICs on the total of the value of the benefit plus the grossed-up tax.
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