Tax Insight: PAYE Settlement Agreement (PSA)

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Keep staff motivated – without passing on the burden of extra tax

How do you keep employees incentivised and rewarded – without also burdening them with extra tax liabilities for benefits like parties, transport and gifts?

Signing up for a PAYE Settlement Agreement (or PSA) helps employers retain responsibility for liabilities arising from certain benefits and payments. We can help you find out how you and your staff could benefit from a PSA – and help you meet the deadlines and other PSA requirements with confidence.

What is it?

A PSA is a statutory arrangement, which you agree annually with HMRC. Under this arrangement, specified benefits in kind and taxable expenses are reported separately from Form P11D. Instead, the employer agrees to settle directly with HMRC all income tax and NIC liabilities that arise from these benefits.

The main benefit is that everything’s kept simple and there are no nasty surprises for staff.

What benefits can be included?

Your PSA can include both benefits in kind and expenses. However, all of these must arise directly from employment. They might include:

Minor benefits, such as late-night taxis for employees, staff entertaining, gift vouchers and other small gifts.

Irregular benefits, such as relocation expenses, a spouse’s travel costs or occasional larger gifts – which might be too big to count as a minor benefit but could qualify if they are not given frequently or at regular intervals.

Benefits paid in circumstances where deducting the tax by PAYE wouldn’t be practical.

Benefits in kind, which are shared between employees and where it wouldn’t be possible to work out each person’s appropriate share.

Tax on the tax

The income tax payable on the benefits and expenses covered must be grossed up on the PSA. This means that, as an employer, you’re agreeing to settle some of your employees’ income tax liabilities – and this itself counts as another taxable benefit. Grossing-up calculates the tax on the benefit as well as the tax on the tax.

Applying for a PSA

To be effective for a particular tax year, a PSA must be agreed by HMRC by 6 July following the end of that tax year. From 2018/19 you do not need to review the PSA each year.

Submitting a PSA return

You can make a PSA return on Form PSA1. Other formats are available, but whichever you choose, you need to provide details of:
  • The benefits and expenses included
  • The taxable values of each category
  • The marginal rates of income tax applicable to the employees receiving the benefits/expenses
  • The income tax due on each category of benefit/ expenses for each marginal tax rate
  • The grossed-up tax payable at each marginal rate
  • The national insurance payable on the grossed-up taxable benefits/expenses (the NIC due falls under the category Class1B).

When is the PSA return due?

Each year, HMRC gives notice of the date for that year’s PSA to be submitted. Normally, this is either 31 July or 31 August following the end of the tax year.

When is the tax and NIC payable?

Irrespective of when the PSA return is required to be submitted, the tax and NIC is payable by 19 October following the end of the tax year.

Our expert team can show you how a PSA could benefit your business.

To find out more, please contact us.