In this section:
- Expenses and benefits: the basics
- Expenses and benefits record keeping
- Dispensation from expenses and benefits reporting
- PAYE Settlement Agreements (PSAs)
PAYE Settlement Agreements (PSAs)
This guide explains what PSAs are and the potential benefits they offer to employers. It sets out the kinds of expense and benefit that can be included in a PSA, and it explains how under a PSA you take on your employees’ tax liability for the items covered. Finally, the guide shows you how to calculate the tax and Class 1B NICs payable to us under a PSA.
On this page:
- What is a PSA?
- What items can and can’t be covered by a PSA?
- How and when to apply
- Calculating tax and NICs under a PSA
- Paying tax and NICs under a PSA
What is a PSA?
A PSA is a flexible scheme you can use to settle any PAYE (Pay As You Earn) tax and National Insurance contributions (NICs) due to us on three types of expense and benefit: minor items, irregular items, and items it’s impractical to operate PAYE on, or to value for P9D/P11D purposes. These categories are explained in more detail in the next section.
If we agree to include an expense or benefit in a PSA, you won’t have to take any of the following steps that might otherwise apply to it:
- include the item on an employee’s form P11D, P9D or P14 at the end of the tax year
- put the item through your payroll to work out any PAYE tax or Class 1 NICs due
- pay Class 1A NICs on the item at the end of the tax year
Instead, you settle the tax and NICs due on the items covered by a PSA with a single payment that includes both:
- the tax due on the expenses and benefits covered by the PSA – note that this tax would normally be payable by your employee (usually through their tax code), and that the tax you pay must be ‘grossed up’ taking account of the tax rates payable by the employees covered by your PSA
- Class 1B NICs, calculated not just on the value of the items covered by the PSA but also on the tax paid under the PSA – this is because paying an employee’s tax liability counts as providing them with a further benefit
What expenses and benefits can and can’t be covered by a PSA?
Only three categories of expense and benefit can be included in a PSA, so the scheme may not apply to many of the expenses and benefits you provide to your employees.
Items that can be covered by a PSA
To be included, expenses and benefits must fall into one of the following three groups:
- minor items: such as a small present for an employee in hospital or an employee’s use of a pool car where the conditions for tax-exemption don’t apply
- irregular items: such as expenses of a spouse occasionally accompanying an employee abroad, or relocation expenses in excess of the £8,000 tax exemption threshold
- items it’s impracticable to operate PAYE on or determine a value for P9D or P11D purposes: such as shared benefits (shared cars or taxi journeys, for example) that are difficult to attribute to individual employees
Items that can’t be covered by a PSA
We won’t include any of the following items in a PSA:
- cash payments – including salary, wages, bonus, or other payments such as long service awards
- large benefits provided regularly to individual employees, such as company cars or beneficial loans
- round-sum allowances – lump sums provided to an employee to take care of all their expenses in a tax year
- shares
- items on which tax has already been deducted through PAYE
- items which are already reflected in an employee’s tax code
- trivial items – such as gift of a box of chocolates or a bottle of wine at Christmas
Business-related expenses and benefits
PSAs help simplify the process of calculating and paying us the tax and NICs due on certain expenses and benefits. So there is no need to include in a PSA items that don’t attract any tax or NICs liabilities – even if the item in question is minor, irregular or impracticable as described above.
For example, while a one-off flight to a client meeting might count as an irregular item, it is a business expense on which no tax and NICs are due. Including it in a PSA would just incur an unnecessary tax/NICs charge for you.
Note that it might make sense for you to apply to have many of your routine business-related expenses and benefits covered under another scheme we operate, by including them in a dispensation:
- like a PSA, a dispensation means there is no need for reporting the items covered on forms P11D or P9D
- unlike a PSA, there is no tax or NICs due on items covered by a dispensation
How and when to apply
To apply for a PSA, you should write to your HM Revenue & Customs (HMRC) office explaining that you want a PSA and describing the expenses and benefits you’d like the PSA to cover. Once we’ve agreed the expenses and benefits to be covered by your PSA, we’ll authorise the agreement and send you a signed form P626.
You can apply for a PSA at any time, but the timing of the agreement will affect the items that can be covered, as described in the following paragraphs.
If a PSA is agreed before the start of the tax year, then there are no limitations – beyond those explained in the previous section – on the expenses and benefits that can be included in it.
If a PSA is agreed during the tax year, you cannot include items provided before the date of the agreement to which either of the following applies:
- PAYE has or should have been operated on the item
- the item has been reflected in the employee’s tax code for the year
If a PSA is agreed after the end of the tax year but before 6 July, you cannot include any items provided during the tax year to which either of the following applies:
- PAYE has or should have been operated on the item
- the item has been reflected in the employee’s tax code for the year
Renewing a PSA
PSAs are annual agreements, which means that you need to make a new agreement each tax year. If there have been no changes since your last PSA was agreed, all you will need to do is sign a new PSA agreement in the same format as before. Your HMRC office will send this to you, usually before the beginning of the tax year to which it applies.
Changing the terms of a PSA
You should inform us straight away if you want to alter the items covered by your PSA. We can agree to change the terms of a PSA before 6 July after the end of the tax year to which it applies.
Calculating tax and NICs under a PSA
Once your PSA has been authorised and you’ve received form P626 from us, your next step is to calculate the tax and NICs that will be due under the PSA.
The subsections below provide an overview of the process and a sample set of calculations. For more help or information, contact our Employer Helpline on Tel 08457 143 143. The helpline is open from 8.00 am to 8.00 pm Monday to Friday, and 8.00 am to 5.00 pm on Saturday and Sunday.
There are four steps involved in working out the total amount payable to us under a PSA:
- First, you must calculate the total value – including VAT – of the expenses and benefits included in your PSA.
- Second, you must calculate the tax due on the items covered by the PSA. Note that the tax due will differ depending on how many employees pay tax at the basic rate and how many pay at the higher rate.
- Third, you must ‘gross up’ this total tax figure – again you will have to take account here of whether employees pay tax at the basic or higher rate.
- Finally, you must calculate Class 1B NICs as a fixed percentage (12.8 per cent) of the combined total of (i) the value including VAT of all the items in the PSA that attract a Class 1 or Class 1A NICs liability, and (ii) the grossed-up tax total from step two above.
We will finalise and confirm with you the total tax and NICs payable between 6 July and 19 October, the date by which payment must reach us (22 October if you pay by electronic means).
To make sure we can agree the amount due by 19 October, you should inform us of the value of the items included in your PSA at the earliest opportunity. This avoids any potential problems due to last-minute notifications.
Sample calculation of the tax and Class 1B NICs owed under a PSA
The sample calculation below applies to a hypothetical business with 100 employees, 80 of whom pay tax at the basic rate, 20 of whom pay at the higher rate. Each of the 100 employees receives expenses and benefits with a value of £50, and all the expenses and benefits attract either a Class 1 or Class 1A NICs liability. The sample calculation uses the tax rates applicable to the 2008-09 tax year.
| Description | Amount |
|---|---|
| (1a) Value of items provided to basic-rate employees (80 x £50) | £4,000.00 |
| (1b) Value of items provided to higher-rate employees (20 x £50) | £1,000.00 |
| (1c) Total value of items provided | £5,000.00 |
| (2a) Tax due on (1a) at basic rate of 20% | £800.00 |
| (2b) Tax due on (1b) at higher rate of 40% | £400.00 |
| (3a) Grossed-up tax from (2a) = £800 x 100/(100-20) | £1,000.00 |
| (3b) Grossed-up tax from (2b) = £400 x 100/(100-40) | £666.67 |
| (3c) Total tax payable = (3a) + (3b) | £1,666.67 |
| (4a) Total value plus total tax payable = (1c) + (3c) | £6,666.67 |
| (4b) Class 1B NICs payable = 12.8% of (4a) | £853.33 |
| Total due to HMRC = (3c) + (4b) | £2,520.00 |
Paying tax and NICs under a PSA
The tax and Class 1B NICs owed under a PSA can be paid to us no later than 19 October following the tax year to which the PSA relates (22 October if you pay by electronic means).
More about paying the tax and Class 1B NICs on your PSA
More useful links
An overview of the tax and NICs rules for expenses and benefits
