Two ring binder files on a desk - one labelled "Compliance", one "Employee Benefits"
Do you need a PAYE Settlement Agreement for 2024/25? Apply by 5 July

Employers looking to simplify the tax compliance obligations relating to minor or irregular benefits provided to employees as well as some reimbursed expenses may want to consider using a PAYE Settlement Agreement (PSA). A PSA can also be used in cases where it is not practical to apportion a benefit to an individual employee.

Employers who haven’t used a PSA before, but who would like to use one for taxable benefits or expenses relating to the year ended 5 April 2025, need to apply to HMRC before 5 July 2025.

What is a PSA?

A PSA allows employers to settle the tax and National Insurance Contributions (NIC) liabilities in respect of certain employee benefits and expenses directly with HMRC, rather than having to declare them on a P11D and have the employee pay the resulting tax and any NIC. This not only saves the employee money, it also avoids the need for the employer to complete P11Ds for relatively low-value benefits or non-allowable expenses.

Where a PSA is used, the taxable amount is ‘grossed up’ by the employee’s marginal tax rate and the employer pays tax and Class 1B NIC on the grossed up amount. As such, you need to know which tax rate the employee pays and it is necessary to split the calculation between Scottish taxpayers, and taxpayers in the rest of the UK.

What are they used for?

PSAs can cover taxable expenses or benefits which are minor, irregular or where it is impractical to calculate the appropriate value that can be allocated to an individual employee. Detailed guidance on these terms is available in HMRC’s PSA manual, but PSAs are commonly used for benefits and taxable reimbursed expenses which are low-value and provided infrequently, but which don’t qualify for tax exemption. Typical examples include:

  • gifts provided to employees which don’t meet the conditions to be treated as trivial benefits (such as those costing more than £50 or gifts in recognition of work performed);
  • the provision of annual staff events and social functions which don’t qualify for tax exemption (such as events not open to all staff or where all annual events cost more than £150 (including VAT) per head);
  • Long service awards that don’t qualify for an exemption (such as due to the length of service or the cost of the award); and
  • expenses reimbursed to the employee which are not allowable for tax (such as personal expenses incurred whilst on a business trip).

How do they work?

Employers need to apply to HMRC to use a PSA by 5 July after the end of the tax year they want to use it for, stating which benefits or expenses they want the PSA to cover.

Once HMRC agree the PSA application, it rolls forward from one year to the next unless the employer (or HMRC) wishes to change or cancel it.

The tax and Class 1B NIC due under a PSA must be paid to HMRC by 22 October after the tax year which the PSA relates to (assuming electronic payment).

An example of how to calculate the employer’s liability under a PSA can be found in HMRC’s PSA Manual, and employers can use Form PSA1 to calculate the amount payable.

HMRC’s guidance on PSAs may be helpful to employers interested in using a PSA for the first time.

 

This article reflects the position at the date of publication. If you are reading this at a later date you are advised to check that that position has not changed in the time since. 

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