A PAYE settlement agreement (PSA) is a voluntary agreement between an employer and an inspector of taxes. Broadly, the employer agrees to meet its employees' tax liabilities relating to certain benefits and expense payments.
A PSA can be used for minor or irregular benefits or expense payments, provided the employer agrees these items with HM Revenue & Customs (HMRC).
The main advantage to this agreement is that once an item is covered by a PSA it does not need to be included on form P11D (or P9D) at the year end. Similarly, your employees do not need to include these items on their personal tax returns.
As such, a PSA can help reduce your business's administrative duties and, because you're reducing your employees' tax liabilities, it should generate goodwill.
The details
In order to use a PSA, the employer and HMRC need to agree on which items are going to be included by 6 July following the end of the tax year concerned.
As the meeting of the tax bill is in itself a benefit, a grossing-up procedure is required. Both the benefit and the tax settled are liable to an employer class 1B national insurance contribution (NIC), that is at the same rate as class 1A NIC. The tax and class 1B NIC has to be paid by 19 October following the end of the tax year concerned.
What items can be included in a PSA?
There are many kinds of expenses and benefits in kind which you can include in a PSA, for example:
- minor items such as taxi fares or incidental travel you pay or reimburse
- the use of a pool car or other assets, such as a company holiday flat, where the items are taxable
- relocation expenses exceeding the statutory threshold for
- non-cash incentive awards or gifts
- items where it is impracticable to apply PAYE or identify precisely what should be included on form P11D – typically taxable staff parties.
Items excluded from a PSA
However, there are a number of benefits and expenses that the inspector of taxes will not accept in a PSA, including:
- ordinary cash wages, salaries and bonuses
- round-sum expense payments (e.g. lump sums provided to employees to cover all expenses incurred during the year)
- major benefits in kind provided on a regular basis for the exclusive use of individual employees (e.g. company car and fuel for that car).
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
