A PAYE Settlement Agreement (PSA) is a more flexible way of dealing with some expenses payments and benefits in kind. It might be able to save you and your employees work by applying to your HM Revenue & Customs (HMRC) office for a PSA.
It is a voluntary agreement between you and your HMRC office under which you agree to
Once you have a signed agreement for a tax year, you do not have to
You pay Class 1B NICs on the items included in PSAs and on the total amount of tax payable, but you will still need to calculate and pay Class 1 NICs where they were due to be paid before the date the PSA agreement was signed.
See flowchart (PDF 25K).
*The terms ‘minor’, ‘irregular’ and ‘impracticable to operate PAYE’ are explained in Statement of Practice SP5/96 (PDF 2.76MB)
Employees whose expenses and benefits in kind are dealt with in a PSA should not include them on their tax return if they receive one.
There are many kinds of expenses or benefits in kind which can be included
These are only examples of what can be included. Your HMRC office will provide you with more details.
Yes. Among other things, HMRC will not include in PSAs
Some relocation expenses are already exempt from tax (see ‘Income tax and relocation packages’), but those which exceed the statutory threshold for exemption will normally be suitable for inclusion in a PSA.
Yes, no matter how many employees you have.
Your HMRC office will want to make sure that
You agree this with the your HMRC office, who will take account of
The tax you pay will be ‘grossed-up’, taking account of the rate(s) of tax payable by the employees covered by the PSA. Grossing up is necessary because paying tax on behalf of an employee gives rise to a taxable benefit.
There is an example of a calculation below.
You agree this with the your HMRC office at the same time as you agree the tax position.
The HMRC will take account of
The Class 1B charge is calculated as a fixed percentage of the total value of the items in the PSA which are normally liable for Class1 or Class 1A NICs and the total grossed-up tax payable under the PSA. Class 1B NICs will be payable on the total grossed-up tax due under the PSA, even if the PSA does not contain any items which would normally be liable for Class 1 or Class 1A NICs. There is an example of a calculation below.
Calculating the tax and Class 1B NICs payable under a PSA
Example for 2007-08
Smith and Jones Ltd has a workforce of 1,000 employees, all of whom receive benefits in kind valued at £50 each. 800 of their employees pay tax at the basic rate, the remaining 200 at the higher rate.
All the benefits attract Class 1A NICs. Without a PSA, this would be payable on 19 July following the end of the tax year.
The tax and Class 1B NICs payable under a PSA would be calculated as follows.
| Description | Amount |
|---|---|
| Value of benefits provided to basic rate employees (800 x £50) | £40,000.00 |
| Tax due @ 22% on £40,000 | £8,800.00 |
| Grossed- up tax £8,800 x 100 / (100 - 22) | £11,282.05 |
| Value of benefits provided to higher rate employees (200 x £50) | £10,000.00 |
| Tax due @ 40% on £10,000 | £4,000.00 |
| Grossed- up tax £4,000 x 100 / (100 - 40) | £6,666.67 |
| Tax payable (£ 11,282.05 + £6,666.67) | £17,948.72 |
| Value of items attracting a Class 1A liability | £50,000.00 |
| Grossed- up tax payable in the PSA | £17,948.72 |
| Total liable to Class 1B NICs | £67,948.72 |
| Class 1B NICs payable (£ 67,948.72 X 12.8%) | £8,697.43 |
| Total payable in the PSA | |
| Tax | £17,948.72 |
| Class 1B NICs |
+£ 8,697.43 |
| Grand Total |
£ 26,646.15 |
You will need to keep records of items which are given to individual employees, and are included in a PSA. Normally these records will be the same as those you will need for your own accounting purposes. If you cannot identify which employee receives a particular expense payment or benefit in kind - for example, which employees used the sports facilities you provide which are not exempt from tax - you will only need to record
The records must be retained for three years.
You, or your accountant, should write to your HMRC office explaining that you would like a PSA. Describe the expense payments and benefits in kind to which you would like the PSA applied. The process is fairly straightforward and once you and your HMRC office have settled what can be included, you will both sign an agreement as a permanent record.
If you agree a PSA for a tax year before the start of that year, you do not need to operate PAYE on any items included in the PSA, or account for any Class 1 or Class 1A NICs which would otherwise be due.
If you agree a PSA for a tax year after the start of that year, you cannot include any items provided before the date of the agreement where
- PAYE has or should have been operated, or
- the item has been taken into account in setting an employee's tax code for the year.
Where items included in the agreement are not ones where PAYE should have been operated, but are liable to Class 1 NICs, you must still pay any Class 1 NICs due on items provided before the date of the agreement. These should be accounted for via your payroll and Employer’s Annual Return (forms P14 and P35).
If you agree a PSA after the end of the tax year, but before 6 July, you cannot include any items provided for that tax year where
- PAYE has or should have been operated, or
- the item has been taken into account in setting an employee's tax code for the year.
Where items included in the agreement are not ones where PAYE should have been operated, but are liable to Class 1 NICs, you must still pay any Class 1 NICs due on items provided before the date of the agreement. These should be accounted for via your payroll and Employer’s Annual Return (forms P14 and P35).
If you have not included benefits in kind or expenses in a PSA agreed by 6 July, and you have not recorded them on form P9D or P11D or operated PAYE/NICs, you may incur penalties and interest. Contact your HMRC office without delay.
Tell your HMRC office immediately if you want to change the scope of a PSA. They will discuss with you what changes you can make.
PSAs are annual agreements, which means that you and your HMRC office will need to make a new agreement each tax year. If there have been no changes since the last PSA, all you will need to do is sign a new agreement in the same format as before. your HMRC office will send this to you, normally before the beginning of the tax year to which it applies.
Your HMRC office will finalise the tax and NICs payable between 6 July and when the payment is due on 19 October. You and your HMRC office can agree a convenient time to do this. Our advice would be for you to provide the value of the items in your PSA at the earliest opportunity so you aware of the agreed amount due by 19 October, and this avoids potential problems that may arise as a result of last minute notifications.
At any time during the year, but no later than 19 October (or 22 October where payment is made by an approved method of electronic communication) following the tax year to which the PSA relates. You will be advised how and where to pay. If the payment is late you may have to pay interest, so if there is a delay in agreeing with your HMRC office the amount payable in your PSA, it would be to your advantage to make a payment on account on or before 19 October (or 22 October where payment is made by an approved method of electronic communication).
Most disagreements of this sort can be resolved by discussing all the facts with your HMRC office. If you remain dissatisfied, you have the right of appeal to the Commissioners, who will determine what is due.
There is no obligation on you to do so. However, employees may ask you why items are not included on their P9D or P11D, especially if they have to complete a tax return. You may want to anticipate these questions by giving your employees appropriate details of your PSA.
No, but in future you may want to consider whether it would be more convenient for you to include incentive awards in a PSA. Normally, all items covered under a formal incentive award scheme will be suitable for inclusion in a PSA. Speak to your HMRC office if you would like more details
No, but you must receive agreement from your HMRC office that a benefit can be treated as exempt from tax on the grounds that the cash equivalent on the employee(s) is so trivial it is not worth pursuing. See trivial benefits.
No. If the third party is making incentive awards then the Taxed Award Scheme can be used to pay the tax on the employer’s behalf.
In rare circumstances, yes. As a consequence of not having to take payments included in a PSA into account when calculating earnings for the purposes of Class 1 NICs, an employee’s gross earnings in certain pay periods may be too low to satisfy the average earnings test for SMP, SPP, SSP or SAP entitlement.
In the event that an employee
you must recalculate their gross earnings for that period to include the value of the payment included in the PSA. Details about this are given in Employer’s Help Books
We produce a wide range of leaflets, booklets and helpsheets designed to explain different aspects of the tax and National Insurance systems in plain English, and to assist with completing tax and NICs returns. Most of them are free.
Some you might find useful are:
Our `Catalogue of leaflets and booklets' gives further information about
our publications, most of which you can get from any HMRC Enquiry
Centre, Tax Office or HMRC National Insurance Contributions
Office.
Addresses are in your local telephone book under `HMRC'. Most offices are open to the public from 8.30am to 4.30pm, Monday to Friday, and some are also open outside these hours. Your local library or Citizens' Advice Bureau may also have copies of our leaflets.
You can also get most of our leaflets by
Many leaflets are also available on the Internet at www. inlandrevenue. gov. uk
You can also get general advice by calling our Employers' Helpline, Monday to Friday 8.00am to 8.00pm, and weekends 8.00am to 5.00pm on 0845 7143 143.
We have a full range of services for people with disabilities, including leaflets in Braille, audio and large print. For details, please ask at your local HMRC office or Enquiry Centre.
