A PAYE Settlement Agreement (PSA) offers businesses in the UK a flexible way to manage the taxation of certain expenses and benefits provided to employees. This agreement enables employers to take on the tax liability for specific benefits and expenses they provide, simplifying the tax reporting process. Here’s a comprehensive guide to understanding PSAs, including what they encompass, how to include items, the payment process, and more.
What is a PAYE settlement agreement?
A PAYE Settlement Agreement is an arrangement between an employer and HM Revenue & Customs (HMRC) that allows the employer to make a single annual payment to cover all tax and National Insurance contributions (NICs) due on minor, irregular, or impracticable benefits and expenses provided to employees. The key advantage of a PSA is that it alleviates the need for employees to pay tax on these benefits, as the employer settles the tax bill on their behalf.
What to include in a PAYE settlement agreement
Items that can be included in a PSA are typically minor, irregular, or impracticable to account for or allocate to individual employees. Examples include:
- Small gifts and vouchers
- Staff entertaining, e.g., the cost of a staff party
- Incentive awards outside of formal schemes
- Personal use of a company asset, such as a company car, for a short period
- Reimbursement of non-business travel expenses
However, it’s essential to note that not all expenses and benefits can be included. Salary, wages, and high-value items are excluded from PSAs.
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How to apply for a PAYE settlement agreement
- The process to apply for a PSA involves contacting HMRC.
- The employer needs to describe the benefits and expenses they wish to include.
- Once HMRC agrees that these items can be part of a PSA, they will issue a formal agreement, which needs to be renewed annually.
- The application for a PSA must be made before the tax year ends (5th April) for which the agreement is to apply.
Calculating and paying your PSA
The calculation of the amount payable under a PSA takes into account the tax and NICs due on the included benefits and expenses. The calculation can be complex, as it must consider the type of benefit, the employee’s tax rate, and whether the benefit is subject to Class 1 or Class 1A NICs.
Employers must calculate the grossed-up tax and NICs due and report this to HMRC after the end of the tax year but before the payment deadline on 22nd October following the end of the tax year (19th October if paying by post). HMRC provides a calculator and guidance to help with this process.
Key benefits of PAYE settlement agreements
- PSAs simplify the administrative process for employers by consolidating tax payments for specific expenses and benefits into a single payment.
- They also enhance the attractiveness of certain employee benefits, as employees are not taxed on these items.
- Furthermore, PSAs can aid in maintaining employee satisfaction by providing additional perks without the tax implications for the individual.
FAQ about PAYE settlement agreements
A PSA is an arrangement with HMRC allowing employers to make a single annual payment to cover all tax and National Insurance contributions on certain benefits and expenses provided to employees, thereby simplifying the tax reporting process.
Employers can apply for a PSA by contacting HMRC and providing a list of the expenses and benefits they wish to include. If HMRC agrees, they will issue a formal agreement that needs to be renewed annually.
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Minor, irregular, or impracticable benefits and expenses such as small gifts, staff entertaining, incentive awards, and personal use of a company asset can be included in a PSA.
Salary, wages, cash payments, and high-value benefits cannot be included in a PSA. The agreement is designed for minor benefits and expenses.
The application for a PSA must be made before the tax year ends (5th April) for which the agreement is to apply.
The tax and National Insurance contributions due under a PSA are calculated on the grossed-up value of the benefits and expenses included, taking into account the employee’s tax rate and the type of NICs applicable.
The payment under a PSA is due by 22nd October following the end of the tax year to which the agreement relates (19th October if paying by post).
Yes, any employer, regardless of their business size, can apply for a PSA with HMRC.
PSAs need to be renewed annually. Employers should review the included items each year and apply for renewal through HMRC.
A PSA simplifies tax reporting for specific benefits and expenses, makes certain employee benefits more attractive since they’re not taxed on the employee, and can improve employee satisfaction.
The main downside is the potential cost to the employer, as they are responsible for covering the tax and NICs on the included benefits and expenses.
Employees benefit from a PSA because they do not have to pay tax or National Insurance contributions on the benefits included in the agreement.
Yes, employers can change the benefits included in a PSA upon renewal each year, subject to HMRC’s approval.
Missing the PSA payment deadline can result in interest and penalties. It’s important to meet the deadline to avoid additional costs.
More information about PSAs, including detailed guidance on applying, calculating payments, and what can be included, can be found on the HMRC website or by contacting HMRC directly.