PAYE Settlement Agreements (PSAs) are a convenient tool for employers, allowing them to cover the tax and National Insurance contributions (NICs) on specific benefits provided to employees.
These agreements simplify settling tax liabilities on minor, irregular, or impractical expenses and benefits, meaning employees do not have to deal with these themselves.
How PSAs work
A PSA lets employers make a single annual payment to cover all taxes and NICs on items that are often challenging to process via regular payroll or P11D forms. They include:
- Minor items such as small gifts
- Irregular items such as a one-off team-building event
- Items that are impractical to assign to individual employees – Such as shared taxi expenses
Employers can reduce administration and keep their employees’ tax affairs straightforward.
Benefits for employers
Using a PSA is beneficial for businesses as it helps streamline the process of reporting certain expenses and perks.
Employers do not need to include the benefits covered by a PSA in employees’ P11D forms or payroll. This reduces paperwork and reduces administrative work for HR and finance departments.
By covering the tax liabilities on certain benefits, employers make sure employees receive the full value of the perks without having to worry about extra tax.
This can help boost morale with employees who won’t have to worry about tax complications being added to these benefits.
With a PSA, businesses only need to make a single payment for the agreed expenses, simplifying the process of paying tax on minor and irregular benefits.
This one-off payment reduces the chance of errors that can occur when trying to process complex and varying benefit structures individually.
Examples of when a PSA is useful
To understand how a PSA can be beneficial, it helps to see practical examples.
Seasonal gifts and parties
If you decide to give your employees small seasonal gifts, such as wine or chocolates, or host a company Christmas party, a PSA enables you to handle these expenses centrally.
Team-building activities
Sending a team to an activity centre as a reward or motivation can be a great way to improve morale, but if you have multiple employees, calculating individual tax liability can be challenging. A PSA streamlines this process.
Employer-sponsored transport
After a late-night work event, offering transportation to employees is often a welcome perk.
Instead of calculating each individual’s portion of the shared taxi fare and determining the related tax, a PSA covers the whole expense in one go.
How PAYE settlement agreements differ from other benefit reporting methods
One of the key distinctions between a PSA and other methods of reporting employee benefits, such as P11D forms or putting items through payroll, is the level of convenience and clarity it provides.
With P11Ds, each employee’s benefits must be individually calculated and processed, which can be time-consuming, especially when dealing with minor or irregular benefits.
PSAs are well-suited for benefits where individual allocation is either impractical or inefficient.
Another distinction is that including benefits in payroll can often result in higher NICs for both the employer and employee.
PSAs, on the other hand, provide a more manageable and often more tax-efficient solution, particularly for low-value benefits that don’t justify the administrative burden.
Application process and deadlines
To apply for a PSA, businesses must contact HM Revenue and Customs (HMRC).
Applications can be made online or by post, and employers need to make sure all arrangements are in place by early July following the end of the relevant tax year.
Once the PSA is agreed upon, employers are responsible for making sure it is signed and returned to HMRC by 5 July following the end of the relevant tax year.
Our team can help you apply for a PSA and work out what needs to be included when you obtain one.
Upcoming deadlines for PAYE settlement agreements
- 19 October 2024 – Payment deadline for PSA liabilities by cheque. HMRC will need to receive payments by this date to avoid penalties.
- 22 October 2024 – Payment deadline for PSA liabilities by electronic means, providing a few extra days for those who use faster payment methods.
Considerations for employers
The decision to use a PSA boils down to the nature and the frequency of the benefits being provided.
PSAs are most effective for low-value or hard-to-allocate expenses, but they are not always suitable for larger, recurring benefits such as company cars or health insurance, which should still be reported separately.
Once an agreement is in place, you need to review it annually.
You can make changes if necessary, but you will need to ensure that HMRC is aware of all expenses and benefits being covered to avoid discrepancies or unexpected tax liabilities.
If you need assistance with applying for a PAYE Settlement Agreement or want to understand how it can benefit your business, contact us today.
