PSA1010 - Overview of PAYE Settlement Agreements: Introduction

A PAYE Settlement Agreement (PSA) is a statutory arrangement with HMRC under which an employer can pay the income tax liability and Class 1b National insurance on minor benefits in kind and expenses payments given to their employees.

Income Tax (Earnings and Pensions) Act 2003 Chapter 1 Part 11, Pay As You Earn Chapter 5 contains the regulations for PSAs.

Employers with a PSA become liable for the income tax and NICs payable and their employees are relieved of liability on the benefits and expenses included in the PSA.

PSAs are entirely voluntary, so an employer may choose to continue to operate PAYE/NICs by sending in Real Time Information submissions or Form P11D.

A PSA will allow employers to

  • meet the tax and NICs payable on certain benefits in kind and/or expenses payments given to their employees,
  • reduce record keeping and paper work for themselves and their employees,
  • use a practical and flexible way of dealing with many of the minor and ‘one-off’ benefits found in employment contracts.

Class 1B National Insurance contributions align the NICs treatment of items included in a PSA with the tax treatment.

Where a PSA is agreed Class 1B NICs

  • replace any Class 1 or Class 1A NICs liability attached to the benefits and/or expenses included in the PSA, and
  • are payable on the total tax payable on a PSA.

Employers who wish to enter into a PSA will approach you with suggestions about what they would like to include. This forms the basis of discussion prior to a formal agreement.

In general contact with employers, you may identify and draw the attention of an employer to the benefits of a PSA and invite them to consider whether they could benefit.

Detailed information about PSAs can be found on the HMRC website at http://www.hmrc.gov.uk/paye/exb/schemes/PSA.htm.