Employers often incur extra costs outside salary payments, usually non-cash rewards for employees, which are taxable benefits in kind (BIK). Some of these expenses are taxed, and HMRC expects employers to use the PAYE Settlement Agreement (PSA) to settle these taxes.
Learn more about PSA below, including how it works, its scope, deadlines, and additional tax-efficient tips for employers.
What is a PAYE Settlement Agreement UK?
Income tax and National Insurance contributions (Class 1B NICs) are charged on specific non-cash taxable benefits provided to employees. The PAYE Settlement Agreement allows employers to settle these taxes in one annual payment. Entering the agreement is voluntary and employers can cancel at any time.
Despite some exemptions, benefits in kind, such as staff entertainment, gifts, and relocation packages, are mostly liable to income tax and National Insurance (NI). Without the agreement, employers must itemise these benefits on P11D forms or through payroll. Using the PSA, employers can conveniently settle tax on benefits by items, paying them one-off in a tax year.
This reduces their administrative burden and streamlines their tax compliance. Moreover, this implies that the company has good governance, even more motivating employees, as PSAs prevent them from facing unexpected tax liability in the future.
How Does the PAYE Settlement Agreement Work?
Employers must first submit a PAYE settlement agreement application either online (gov.uk website) or by post. Once approved, it becomes an ‘enduring agreement,’ automatically renewing each year unless employers add new items to the benefits.
If it is approved before the start of a tax year, all included expenses and benefits can be settled under the agreement. Some items may need to be reported separately using form P11D or through payrolling if the PSA is only approved after the tax year starts.
Every year, employers will then have to submit annual calculations of the income tax and NI due, categorising them for Scottish, Welsh, and rest of UK employees. This calculation is submitted to HMRC after the tax year ends, alongside the employers’ NI payment on the gross amount.
What Does the PAYE Settlement Agreement Include?
The PSA covers benefits and expenses in three categories—minor, irregular, and impracticable—excluding cash payments. These expenses must be pre-agreed with HMRC. See some PAYE settlement agreement examples of coverage below:
Minor Benefits and Expenses
- small gifts
- vouchers
- incentive awards for long service
- telephone bills
- staff entertainment (e.g., annual parties)
Irregular Benefits and Expenses
- relocation expenses exceeding the £8,000 exemption
- costs of attending overseas conferences
- use of company holiday flats
Impracticable Benefits and Expenses
- personal care
- shared cars
- large staff events
What Does PSA Not Include?
The following are excluded from PSA:
- Cash payments. These, including round sum allowances, are processed through PAYE and NIC.
- Regular or large benefits. Certain items (e.g., company cars, medical insurance, etc.) are reported on form P11D or through payroll benefits.
What is the PAYE Settlement Agreement Deadline?
Here are the deadlines for the PAYE Settlement Agreement:
- Application deadline. Employers must agree on a PSA with HMRC by 5 July after the relevant tax year ends; for instance, 5 July 2024 for the 2023/24 tax year.
- Calculation deadline. The calculation must be submitted to HMRC by 31 July.
- Payment deadline. Tax liabilities must be paid by 19 October (or 22 October for electronic payments) after the relevant tax year.
It is highly recommended for employers to enter a PSA as soon as eligible costs are identified.
How Is the Payment Calculated?
To work out the income tax and National Insurance contributions due under a PSA, employers need the following information:
- total value of benefits or expenses
- number of recipient employees
- number of employees in each income tax bracket
- value distribution of benefits and expenses
To get accurate results, it is best for employers to seek tax professionals’ advice.
Tips for Employers on PAYE Settlement Agreement
PSAs are generally more cost-effective than grossing up through payroll. Here are some ways employers can maximise this agreement:
- Review Costs Thoroughly: Employers should ensure all appropriate costs are included whilst excluding those covered by exemptions. Higher rate taxpayers face a marginal tax rate of around 90% on PSA costs.
- Apply Standard Exemptions: Exemptions must be used for items like annual functions and trivial benefits to avoid unnecessary tax and NIC bills.
- Plan the Budget Wisely: For instance, a £100 Christmas voucher is taxable. Employers should evaluate how to allocate the budget to minimise tax burdens.
- Use Broad Descriptions: Employers should employ broad categories like ‘staff entertaining’ to avoid frequent updates. Annually reapplying for a PSA is not necessary unless adding new items.
- Prepare for Separate Computations: HMRC requires separate computations for different regions—England and Northern Ireland, Scotland, and Wales—with Scotland having different rates.
Need Advice? Legend Financial Can Help
If you are not sure how to proceed with using the PAYE Settlement Agreement, Legend Financial is here to help. We have been helping a lot of individual taxpayers and businesses settle their tax affairs and payroll management needs for over ten years. Reach us today!
