Understanding PAYE Settlement Agreements: A Guide for Employers

In the UK, employers have a range of responsibilities when it comes to paying their employees, and one of the key obligations is ensuring that the correct tax is deducted from employees’ salaries. However, in certain cases, it can be difficult for employers to determine exactly how to calculate the tax and National Insurance contributions (NICs) for certain employee benefits. This is where PAYE Settlement Agreements (PSAs) come in.

What is a PAYE Settlement Agreement?

• A PSA is an agreement between an employer and HM Revenue & Customs (HMRC) that allows employers to simplify the process of paying tax on certain benefits provided to employees. 
• In order for the benefit/expense to be included on a PSA, it must be one of the following:
  • Minor
  • Irregular
  • Impracticable (difficult to place a value on or divide up between individual employees)
• Unlike a P11D, the tax and NIC on benefits included in a PSA are settled by the employer rather than the employee.
• As the tax and NIC are being settled by the employer, the cost can be significant.

What benefits can be included in a PAYE Settlement Agreement?

As covered earlier, not all benefits are eligible for inclusion in a PSA.  Typically, only minor or infrequent benefits that would be difficult to report through regular payroll are covered by the agreement. Examples of this are:

• Gifts to employees not covered by the trivial benefit/long service award exemption.
• Employee entertainment where costs do not meet the criteria for exemption.
• Discounted services or the provision of small gifts, where it would be impractical to track individual costs.

It’s important to note that some employee benefits, for example, company cars or loans, cannot be included in a PSA as they are subject to more detailed and separate tax rules, and therefore must be included in a P11D or via payrolled benefits.

Steps for a PAYE Settlement Agreement

In order for an employer to have a PSA, the following steps must be taken:

• The employer (or their agent) applies for a PSA with HMRC, normally, this is done online. It can be applied for by post, though there are usually delays with this method.
• Subject to no objection from HMRC, they (HMRC) accept the PSA application, and this agreement/acceptance must be in place prior to 5 July following the end of the tax year to which it relates. 
• The employer/agent identifies amounts to be included in the PSA calculation, calculates the grossed-up tax and NIC and then submits this to HMRC.  While there is no statutory deadline for the calculation to be submitted, HMRC likes to have this by the end of July/August.  This allows them to agree the calculation and issue the payment instructions.
• Payment of tax and NIC is made to HMRC by 22 October following the end of the tax year to which the calculation relates (19^th October if paying by cheque) – this is also the absolute deadline for submitting the PSA calculation to HMRC.
• Once in place, the PSA remains active until HMRC or the employer cancels it, i.e. no need to reapply each year.
• Any changes to the types of benefits included on a PSA must be agreed with HMRC – this must be done by 5 July following the end of the tax year in which the new benefits are to be included

Benefits of a PAYE Settlement Agreement

There are several reasons why an employer might choose to use a PSA:

• Employee satisfaction: Since the employer takes responsibility for paying the tax on these benefits, employees do not have to worry about the tax implications, which can increase employee satisfaction, particularly with minor benefits or gifts.
• Time saver: A PSA can simplify the tax reporting process for employers. Instead of reporting benefits on (potentially) multiple P11Ds, employers need only one form covering all employees.
• Simplification: Businesses with many employees, or those that provide minor benefits to staff, can reduce their administrative burden by reporting benefits on a PSA, which is more straightforward when compared with reporting on P11Ds/payrolled benefits.

What are the costs and implications for employers?

There are a few important considerations for employers when it comes to PSA:

• The employer bears the cost: Although the employee doesn’t have to pay the tax, the employer will be responsible for the costs associated with the benefits, including any taxes due. It’s important for employers to budget for this expense when entering into a PSA particularly as the tax/NIC payable by the employer for benefits provided to higher-rate tax payers can be equal to, and in some cases more than, the cost of the benefits provided.
• Final payment deadlines: Employers must ensure that payments are made to HMRC on time to avoid any penalties or interest on overdue liabilities.
• Complexity in some cases: While PSAs are designed to simplify tax matters, they do require a clear understanding of the rules around which benefits can be included and how the calculation of taxes due is prepared.

Conclusion

A PSA can be a valuable tool for employers, allowing them to simplify the tax reporting process on certain employee benefits. By taking responsibility for paying the tax and National Insurance on minor or infrequent benefits, employers can reduce their administrative burden and avoid passing tax liabilities onto employees. However, employers should ensure they fully understand the cost to the business of reporting benefits via a PSA and meet the deadlines for reporting and payment.  

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