PAYE Settlement Agreements (PSAs)

What is a PSA?

PSAs are widely used by employers to ensure compliance around employee expenses and benefits processes. By entering into this formal arrangement, an employer can settle any tax due on expenses and benefits provided to employees by way of an annual submission and payment to HM Revenue & Customs (HMRC), rather than return them as benefits in kind on forms P11D or include them in the payroll.

You need to agree with HMRC the type of expenses and benefits you want to be included in the PSA before the annual deadline. If HMRC accepts the application, you will then submit to HMRC a calculation of the tax and NIC due on a grossed up basis at the appropriate rate of tax and pay the amount due.

The agreement will continue until either you or HMRC cancels it, or you need to change it. You do not need to renew the PSA each tax year.

What are the benefits of a PSA?

As mentioned above, a PSA is a useful tool to help facilitate the provision of benefits to employees, without the employee having to foot the tax cost.

A PSA can also help to reduce administration for the employer, by eliminating the requirement to include certain taxable expenses/benefits on employee P11Ds and replacing it with an annual settlement to HMRC.

Another advantage of a PSA is reduced exposure to penalties and interest. It can be difficult to keep track of the tax reporting requirements of all the expenses being paid to employees throughout the year. This can lead to easy pickings for HMRC at the inevitable employer compliance visit. PSA allows you to undertake a review at the end of the year to ensure you have picked up all those taxable items. It can also help you to demonstrate to HMRC that you understand the issues and you are taking your compliance arrangements in this area seriously.

What is included?

The expenses or benefits you include in a PAYE Settlement Agreement (PSA) must be either:

Minor
There is no pre-determined limit to the value, but it might include items such as:

• incentive awards, for example for long-service
• telephone bills
• small gifts and vouchers
• staff entertainment, for example a ticket to an event
• non-business expenses while travelling overnight on business that are over the daily limit

Irregular
Things that are not paid at regular intervals over the course of a tax year. They’re also things that employees do not have a contractual right to, such as:

• relocation expenses over £8,000 (these are tax-free below £8,000)
• the cost of attending overseas conferences
• expenses of a spouse accompanying an employee abroad
• use of a company holiday flat

Impracticable
Things that are difficult to place a value on or divide up between individual employees, such as:

• staff entertainment that is not exempt from tax or National Insurance Contributions
• shared cars
• personal care expenses, for example hairdressing

What is not included?

You cannot include wages, high-value benefits like company cars, or cash payments such as bonuses, round sum allowances or beneficial loans.

How do you get a PSA?

A PSA is a formal arrangement, applied for in writing, between employer and HMRC.

1. Write to HM Revenue and Customs (HMRC) Business Tax and Customs describing the expenses and benefits you want the PAYE Settlement Agreement (PSA) to cover.
   PAYE Settlement Agreements
   HM Revenue and Customs
   BX9 2AN
2. Once they’ve agreed on what can be included, they’ll send you 2 draft copies of form P626. Sign and return both copies. HMRC will authorise your request and send back a form – this is your PSA.
3. You’ll need to report anything that cannot be included separately using form P11D. You do not need to send a P11D if you’re paying employees’ expenses and benefits through your payroll.
4. Complete and submit the online form to tell HMRC how much you’ll need to pay. If you do not, HMRC will calculate the amount. You’ll be charged more if this happens.
5. HMRC will get in touch with you before 19 October following the tax year that the PSA covers, to confirm the total tax and National Insurance you need to pay.

You’ll need to give an agent a signed letter of authority to make a PSA on your behalf if they do not have authorisation to do so.

What are the deadlines?

PSA application deadline – 5 July following the end of the tax year it applies to.

PSA payment deadline – 22 October following the end of the tax year. You may be charged interest and penalties if payment is late.

What to pay when the PAYE Settlement Agreement is approved?

If HMRC approves your PSA before the start of a tax year, you can include any expenses and benefits contained in the agreement.

If they approve it after the start of the tax year, you might need to report some items separately.

If your PSA is approved before 6 April

You must use form P11D to report expenses and benefits provided before the agreement date that you:

• have already included in your employee’s tax code
• included (or should have included) in your employee’s PAYE tax and National Insurance deductions

If your PSA is approved between 6 April and 5 July

You must use form P11D to report expenses and benefits provided during the tax year that you:

• have already included in your employee’s tax code
• included (or should have included) in your employee’s PAYE tax and National Insurance deductions

How can Finerva help?

If you would like more information or would like to apply for a PSA, please contact mel@finerva.com.

Note: To apply for a PSA for the tax year 2022/23 before the deadline, please let us know by 30 April 2023.