PAYE settlement agreements

By Tolley
Personal_tax_img3

The following Personal Tax guidance note by Tolley provides comprehensive and up to date tax information covering:

  • PAYE settlement agreements
  • What can be covered by a PSA?
  • What items cannot be included in a PSA?
  • Applying for a PSA
  • Calculation of the tax and Class 1B NIC due
  • Advantages of a PSA
  • Why might an employer not want to put a PSA in place?
  • Variation or withdrawal of a PSA

Employers sometimes provide benefits for their employees and wish to pay the tax on behalf of the employees. A PAYE settlement agreement (PSA) is an annual voluntary agreement which enables them to do this. Any item covered by a PSA does not need to be reported on an employee’s form P11D .

ITEPA 2003, s 703

The payment of tax on behalf of an employee is itself a taxable benefit and this is taken into account by grossing-up the cash equivalent (see below). Class 1B national insurance contributions (NIC) are payable by the employer on the total benefit including the tax due. The rate of Class 1B NIC is 13.8% from 2011/12 onwards.

Using a PSA can save significant administrative costs as there is no need to report minor and incidental benefits individually, so there may be an overall saving for the employer.

See Example 1.

What can be covered by a PSA?

A PSA covers expense payments and benefits which are either:

  • minor
  • irregular
  • impracticable to run through the payroll or report on an employee’s form P11D

SI 2003/2682, reg 106(3)

These terms are not defined in the legislation. The regulations require the employer and the HMRC Officer to agree where payments are of an amount, or are paid in circumstances, which satisfy one or other of the terms. In discussion with the employer, the Officer is expected to make a reasonable judgement based on the natural meaning of the words.

There is some discussion of the terms below, which is taken from SP 5/96.

To decide whether an item can be included in a PSA, see the flowchart in SP 5/96, Annex A , which is reproduced in PSA2020.

In Chapter 2 of

More on Employment: