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 HM Revenue and Customs (HMRC) under a PSA.

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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 HMRC 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 HMRC 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

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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

HMRC 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
  • profits arising from various mileage payment schemes and other regular items arising in Employee Car Ownership Schemes

Read an overview of the tax and NICs rules for expenses and benefits

Expenses and benefits record keeping

Download HMRC's flowchart to see what can and can't be included in a PSA (PDF 26K)

Business-related expenses and benefits

PSAs help simplify the process of calculating and paying HMRC 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 HMRC 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

Read more about dispensations

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How and when to apply

To apply for a new PSA (see the later paragraph if you are renewing a PSA), you should write to:

HMRC
Local Compliance
Specialist Employer Compliance
Dukes Court
Duke Street
Woking
Surrey
GU21 5XR

You should explain that you want a PSA and describe the expenses and benefits you'd like the PSA to cover. Once HMRC have agreed the expenses and benefits to be covered by your PSA, they will 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. The HMRC office that issued your PSA 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 HMRC straight away, by contacting the office that issued the PSA, if you want to alter the items covered by your PSA. HMRC can agree to change the terms of a PSA before 6 July after the end of the tax year to which it applies.

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Calculating tax and NICs under a PSA

Once your PSA has been authorised and you've received form P626 from HMRC, 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 HMRC's Employer Helpline.

There are four steps involved in working out the total amount payable to HMRC 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, how many pay at the higher rate and how many pay at the additional 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, higher or additional rate.
  • Finally, you must calculate Class 1B NICs as a fixed percentage (13.8 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.

HMRC will finalise and confirm with you the total tax and NICs payable between 6 July and 19 October, and the date by which payment must reach HMRC (22 October if you pay by electronic means).

To make sure HMRC can agree the amount due by 19 October, you should inform them of the value of the items included in your PSA at the earliest opportunity. You can do this using form PSA1.

Go to form PSA1 PAYE Settlement Agreement Calculation

Find contact details for HMRC's Employer Helpline

Sample calculation of the tax and Class 1B NICs owed under a PSA

The sample calculation below applies to a hypothetical business with 1,200 employees, 800 of whom pay tax at the basic rate, 200 of whom pay at the higher rate and 200 of whom pay at the additional rate. Each of the 1,200 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 2011-12 tax year.

Description

Amount

(1a) Value of items provided to basic rate employees (800 x £50)

£40,000.00

(1b) Value of items provided to higher rate employees (200 x £50)

£10,000.00

(1c) Value of items provided to additional rate employees (200 x £50)

£10,000.00
(1d) Total value of items provided £60,000.00

(2a) Tax due on (1a) at basic rate of 20%

£8,000.00

(2b) Tax due on (1b) at higher rate of 40%

£4,000.00
(2c) Tax due on (1c) at additional rate of 50% £5,000.00

(3a) Grossed-up tax from (2a) = £8,000 x 100/(100-20)

£10,000.00

(3b) Grossed-up tax from (2b) = £4,000 x 100/(100-40)

£6,666.67

(3c) Grossed-up tax from (2c) = £5,000 x 100/(100-50)

£10,000.00

(4a) Total tax payable = (3a) + (3b) + (3c)

£26,666.67
(5a) Value of items attracting Class 1A liability = (1a) + (1b) + (1c) £60,000.00
(5b) Grossed-up tax payable in the PSA = (3a) + (3b) + (3c) £26,666.67
(5c) Total liable to Class 1B NICs = (5a) + (5b) £86,666.67
(6a) Class 1B NICs payable (86,666.67 x13.8%) £11,960.00
Total payable in the PSA:  
(7a) Tax (4a) £26,666.67
(7b) Class 1B NICs (6a) £11,960.00
(7c) Total = (7a) + (7b) £38,626.67

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PSAs and statutory payments

In rare circumstances, having a PSA in place can affect an employee's entitlement to any of the five statutory payments:

  • Statutory Sick Pay (SSP)
  • Statutory Maternity Pay (SMP)
  • Ordinary Statutory Paternity Pay (OSPP)
  • Additional Statutory Paternity Pay (ASPP)
  • Statutory Adoption Pay (SAP)

This can occur if your PSA includes payments to the employee that would otherwise have been liable for Class 1 NICs. Because of their inclusion in the PSA, these payments don't count in the calculation of the employee's earnings - and this might cause the employee's earnings to fall below the level required to qualify for statutory payments.

In these circumstances, you must recalculate the employee's gross earnings to include the value of any payments that are included in your PSA and that would otherwise have been liable for Class 1 NICs.

Further details are available in HMRC's four statutory payments helpbooks. Download the helpbooks using the links below.

E14, 'Employer Helpbook for Statutory Sick Pay' (PDF 316K)

E15, 'Employer Helpbook for Statutory Maternity Pay' (PDF 288K)

E16, 'Employer Helpbook for Statutory Adoption Pay' (PDF 380K)

E19, 'Employer Helpbook for Statutory Paternity Pay' (PDF 394K)

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Paying tax and NICs under a PSA

The tax and Class 1B NICs owed under a PSA are to be paid to HMRC no later than 19 October following the tax year to which the PSA relates (22 October if you pay by electronic means).

There are special rules to follow when paying PSA tax and NICs. You should not use your normal PAYE Accounts Office reference number as the payment will credit to the wrong account and this will cause delays in crediting your PSA account. Our guide 'How to make PAYE Settlement Agreement payments' explains exactly what you must do.

How to make PAYE Settlement Agreement payments

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Technical guidance

PSA1000: Overview of PAYE Settlement Agreements

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