PAYE Settlement Agreements (PSA) ― overview

Produced by Tolley in association with Robert Woodward
PAYE Settlement Agreements (PSA) ― overview

The following Employment Tax guidance note Produced by Tolley in association with Robert Woodward provides comprehensive and up to date tax information covering:

  • PAYE Settlement Agreements (PSA) ― overview
  • Why use a PSA?
  • Why might an employer not want to put a PSA in place?
  • Complexity of the application and calculation
  • The mechanics of a PSA
  • Minor
  • Irregular
  • Impracticable
  • What items cannot be included in a PSA?
  • Timing of the agreement
  • More...

PSAs are optional arrangements that allow employers to include minor or irregular benefits and expenses in a separate return instead of reporting them in form P11D and accounting for Class 1 or Class 1A NIC.

Why use a PSA?

PSAs are popular with employers because they avoid the requirement to complete P11Ds for certain benefits (potentially removing the requirement for P11Ds to be prepared for some employees depending on the benefits provided) and also mean the employee does not bear the tax and NIC cost of the benefit. For example, gifts provided to employees or the provision of staff entertainment are generally liable to tax / NIC (see the Gifts and Entertainment ― staff guidance notes) but are provided by employers as a perk.

The popularity of such gifts and events with the employees would however be diminished if they had to pay tax on the benefit. The PSA passes the tax and NIC liability on these benefits to the employer so the employee receives the benefit free of any tax or NIC.

Using a PSA can save significant administrative costs as there is no need to report minor and incidental benefits individually; however, the tax and NIC cost is significant, so it will be necessary for the employer to balance the cost of tax and NIC versus time spent on administration.

See Example 1.

Why might an employer not want to put a PSA in place?

A PSA is expensive for the employer as it must pay grossed-up tax on the benefit as well as Class 1B NIC. However, there are also some other reasons the employer might not want to apply for a PSA.

Complexity of the application and calculation

The employer may choose to use an adviser to complete the application and calculation if the time and / or complexity make doing it in-house impractical.

A PSA may save time compared to the completion of forms P11D or inclusion of the items in payroll. However, PSAs are expensive for the

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