PAYE settlement agreement
A PAYE Settlement Agreement (PSA) is an agreement with HM Revenue and Customs (HMRC) that allows employers to pay certain types of tax and National Insurance Contributions (NIC) on behalf of their employees. This can be particularly beneficial for covering benefit obligations that are minor, irregular, or impractical to impose through payroll.
Below we have provided a guide to how PSAs work, their benefits and the process involved.
What is a PAYE Settlement Agreement (PSA)?
A PSA is a voluntary arrangement allowing employers to make a single annual payment to cover tax and NICs on specific expenses and benefits provided to employees. This often simplifies the process for both the employer and employees, ensuring that employees do not have to worry about the tax implications of lower benefits and expenses.
Advantages of a PSA
1. Simplification – PSAs simplify the tax process by consolidating multiple tax obligations into a single annual payment.
2. Employee Satisfaction – Employees benefit because they do not have to deal with the tax implications of covered expenses and benefits.
3. Ease of administration – A PAYE Settlement Agreement (PSA) is an agreement with HM Revenue and Customs (HMRC) which allows employers to settle certain types of tax and National Insurance Contributions (NIC) on behalf of their employees , thereby reducing the administrative burden on employers, who would otherwise have to report these expenses and benefits via P11Ds or payroll.
What can be included in a PAYE settlement agreement?
Not all expenses and benefits can be included in a PSA. The types typically covered fall into three categories:
1. Minor items – such as small gifts, staff entertainment or non-monetary vouchers.
2. Irregular items – such as one-off moving expenses that exceed the tax exemption limit.
3. Impractical items – such as shared benefits, where it is difficult to assign the exact cost to each employee.
Setting up a PAYE settlement agreement
To set up a PSA, here are the steps to follow:
1. Applying to HMRC – Employers must apply to HMRC to create a PSA. This must be done in writing to HMRC with details of the benefits and expenses you wish to cover.
2. Agreement – Once HMRC has agreed, they will send a PSA agreement form for the employer to sign and return.
3. Annual calculation – Each year the employer must calculate the total value of the benefits and expenses included in the PSA, determine the tax and NICs due and make a one-off payment.
Calculation of tax and NICs
Calculating tax and NICs for a PSA involves several steps:
1. Gross-up – Since the employer pays the tax, benefits and expenses must be gross-up to reflect the tax that would have been payable by the employee.
2. Tax Calculation – Apply the appropriate tax rates for each individual to the gross-up amounts.
3. Calculation of NICs – Class 1B NICs are payable on the increased value of benefits and expenses.
Deadlines and payment
Employers must apply for a PSA no later than July 5 following the end of the fiscal year in which benefits and expenses were provided.
Payment of taxes and NICs under a PSA must be made before October 22 (or October 19 if paid by check – yes, checks still exist!) depending on the tax year to which it relates .
Renewing a PAYE settlement agreement
Once a PSA is in place, it usually continues until the employer or HMRC cancels it. Employers should review and renew the agreement annually, ensuring it always accurately reflects the benefits and expenses provided.
Conclusion
A PAYE settlement agreement can be a valuable tool for employers who wish to provide benefits to their employees but do not want their employees to suffer a detriment by having to pay tax on the value of the benefits provided.
Next steps
By understanding the process, benefits and compliance requirements, employers can effectively manage their tax obligations under a PSA. If you would like further advice, please contact us.
