Making a PAYE Settlement Agreement with HMRC

Making a PAYE Settlement Agreement (PSA) with HMRC can simplify how you handle tax and NI contributions on small or irregular benefits made to your employees.  In this post we outline the process, benefits and considerations for securing a PSA with HMRC.

PAYE Settlement Agreement

What is a PAYE Settlement Agreement (PSA)?

You might use a PSA for minor or irregular benefits for which it is impractical to operate PAYE or include in a P11D. Therefore a PSA can reduce record-keeping and paperwork for both you and your employees

A PSA is a voluntary agreement between your business and HMRC. Additionally it can be entered into during a tax year or before 6 July following the end of the tax year for which it should take effect. Furthermore, the earlier the agreement is made with HMRC the more flexible it can be.

What can I include in a PSA?

A payment of expenses or benefits qualifies for inclusion in a PSA if it is ‘minor’, irregular or impractical. 

Minor benefits

HMRC don't have  any pre-set monetary limits to define 'minor' however some examples of these are as follows:

  • Incentive awards, for example for long-service (outside the tax exemption).
  • 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 benefits

A payment of expenses or BIKs can be included in a PSA. However, this is only where the type of benefit provided  or sum paid is ‘irregular’. 

What's more, you'll need consider the nature of the item, the normal frequency of its payment across your employees. Additionally, you'll need to consider how often it was paid or given to an individual employee.

Some examples of these are as follows:

  • Relocation expenses exceeding £8,000. In other words, those outside the tax exemption.
  • Expenses of a spouse occasionally accompanying an employee abroad.
  • Use of a company holiday flat.
  • One-off gifts which are not minor.
Impracticable benefits

A payment of expenses or benefit in kind can also be included in a PSA where it is ‘impracticable’ to operate PAYE on the sums paid or type of benefit provided.

Some examples of 'impracticable' benefits are as follows:

  • Firstly, staff entertainment that is not exempt from tax or NICs.
  • Secondly, shared cars.
  • Lastly, personal care expenses, e.g. hairdressing, free manicure etc.

HMRC will expect you to check, before entering into a PSA, whether any expenses or benefits can be declared within Real-Time Information (RTI) submissions. Alternatively, it may be possible to declare them using form P11D or by payrolling taxable benefits and expenses (formally or informally). 

Wherever you can reasonably attribute a taxable benefit or expense to an individual employee, it should be reported through RTI, form P11D or by payrolling taxable benefits and expenses.

Furthermore, where the rules for trivial benefits are applied this can reduce the number of transactions reportable on a PSA.

Agreeing a PAYE Settlement Agreement with HMRC

Applying online is the most effective way of obtaining HMRC's agreement to a PSA. If your online request is authorised you should receive a confirmation letter or email followed by your PSA by post.

HMRC may not agree to allow items to be included that should have gone through PAYE before the agreement was approved. Once agreed with HMRC a PSA will last indefinitely unless changes are necessary.

A PSA cannot be used for cash wages and bonuses, beneficial loans, or items already reflected in an employee’s tax code for the year. Additionally, they can't be used for benefits where special computation rules. For example, company cars, accommodation or share schemes.

Complying with a PSA

Once a PSA is agreed you become liable for the Income Tax and NICs payable. As a result, your employees are relieved of any liability on the benefits and expenses included in the PSA.

As a result Class 1B  National Insurance replaces any Class 1 or Class 1A NIC liability attached to the benefits and expenses included in the PSA.

Additionally, Class 1B NICs are payable on the total Income Tax liability arising from the PSA.
HMRC will notify you of the date you need to provide details of you calculations of the Income Tax and Class 1B NICs due on the items covered by the PSA. 

You can now submit your calculations online to HMRC.  They will then review them and raise a PSA charge confirming the total liability. Payment of the Income Tax and Class 1B NICs is due by 19 October following the relevant tax year if paying by post. Alternatively it is by 22 October if paying electronically. Late payment penalties and interest may apply if these deadlines are missed.

You must also retain PSA records for at least three years following the end of the tax year to which they relate. These records should evidence the benefits and expenses included in the PSA, calculations of Income Tax and NIC liabilities due and payment of these liabilities to HMRC.

Summary

Making a PAYE Settlement Agreement with HMRC can greatly reduce the administrative burden associated with minor employee benefits. By understanding and utilising PSAs, you can comply. As a result this eases the tax reporting process for both your business and your employees.

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