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A PAYE Settlement Agreement (PSA) allows employers to make one annual submission and payment to cover all the tax and National Insurance due on small or irregular taxable expenses or benefits for your employees.
This is a very useful simplification for processing certain expenses or benefits and can significantly reduce reporting requirements.
What can be included in a PSA?
The expenses or benefits included in a PSA must be defined as one of the following:
This is where there is no pre-determined limit to the value, but it might include items such as small gifts not covered by the trivial benefits rules. Examples of minor benefits and expenses include:
- incentive awards, for example for long-service
- telephone bills
- small gifts and vouchers
- staff entertainment (for example, a ticket to an event)
- non-business expenses while travelling overnight on business that are over the daily limit
This includes items not paid at regular intervals over the course of a tax year. Examples of irregular expenses and benefits include:
- relocation expenses over £8,000 (these are tax-free below £8,000)
- the cost of attending overseas conferences
- expenses of a spouse accompanying an employee abroad
- use of a company holiday flat
This includes items where it would be difficult to work out the value of or divide up between individual employees. Examples of impracticable expenses and benefits include:
- staff entertainment that is not exempt from tax or National Insurance Contributions (NICs)
- shared cars
- personal care expenses (for example, hairdressing)
Where employers get a PSA for these expenses or benefits, they will not be required to:
- process these items through their payroll to work out tax and NICs
- report benefits included in the PSA on the employee’s P11D
- pay Class 1A NICs on them at the end of the tax year (the employer will pay Class 1B NICs as part of their PSA instead)
What can’t be included in a PSA?
Not all items can be included in a PSA. For example, you cannot include wages, high-value benefits like company cars, or cash payments such as:
- cash bonuses
- round sum allowances
- low-interest loans in a PSA
Applying for a PSA
A PSA is a formal arrangement between the employer and HMRC and must be applied for in writing. If you don’t already have a PSA in place, you must apply by 5 July 2021 for benefits and expenses provided in the 2020-21 tax year.
Once a PSA is in force it remains valid unless changed or cancelled by either the employer or HMRC. If you have had a PSA in place for a long time, we would recommend carrying out a review to see if the agreement is still providing the most optimal tax benefits.
To apply for a PSA an employer must write to HMRC providing details of the benefits and expenses they want to be included in the PSA. Once HMRC agrees on the items within the PSA, they will send two draft copies of form P626. Both copies will need to be signed and resent to HMRC. One copy will them be signed by HMRC and returned back to the employer. This should be kept safely as it is proof that a PSA is in place.
The PSA1 form is used to calculate the amount of tax and Class 1B NICs due on benefits and expenses provided within a PSA. This should be sent to HMRC after the end of the tax year. Any tax or NICs due for 2020-21 under a PSA must be paid electronically to clear into HMRC’s bank account by 22 October 2021. Employers that pay by cheque must ensure that the payment reaches HMRC by 19 October 2021. If you miss this deadline, interest and penalties may be charged.