A PAYE Settlement Agreement (PSA) is an annual agreement made with HMRC, which allows employers to settle the tax and National Insurance (NI) due on small or irregular taxable expenses or benefits provided to employees. An agreement must be put in place with HMRC by 6 July following the end of the tax year so for the 2016/17 tax year, the agreement would need to have been put in place by 6 July 2017.
The tax and NI due in relation to the PSA calculation is then due for payment by 19 October if paying by cheque or 22 October if paying online. The tax due is calculated on a grossed up basis at the employees’ marginal rate, given that the employer meeting the tax is seen as a further benefit. Class 1B employer NI is then calculated on the benefit value plus the grossed up tax.
Items included in a PSA do not require any further reporting on forms P11D or on employees’ tax returns.
Items that can be included in a PSA must fall into one of the following categories:
- Minor items e.g. a small birthday present
- Irregular items e.g. relocation expenses in excess of the £8,000 tax exemption threshold
- Items it’s impracticable to operate PAYE on or determine a value for P11D purposes e.g. staff entertaining and shared benefits such as shared cars or taxi journeys that are difficult to attribute to individual employees
Examples of items that cannot be included in a PSA would be:
- Cash payments including salary, wages, bonus and other payments such as long service awards
- Round-sum allowances
- Large benefits provided regularly to individual employees, such as company cars or beneficial loans
There are some useful exemptions that can be utilised in relation to common PSA items, these include:
- An exemption for annual staff functions open to all employees costing less than £150 per head. This is an area that can often get confused and is a key area HMRC will focus on in any PAYE compliance review.
- A £50 per year of service exemption where a long service award is given in respect of an employee with 20 years of service as long as they have not had a long service award in the previous 10 years. The second part is critical for the exemption to apply.
- An exemption for trivial benefits costing less than £50.
If you require any assistance with preparing the PSA calculation or advice on the exemptions available and how to apply these, please contact Brittany Gordon (email@example.com) or your usual AAB contact.