What is a PAYE Settlement Agreement?

Posted: Apr 8, 2019

Whilst reviewing the Company’s PAYE policies, employers should also consider whether they should be making use of a PAYE Settlement Agreement (‘PSA’), which could help to save a lot of time.

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If the employer is paying taxable benefits to employees or paying expenses to employees but, for one reason or another, it is difficult or impractical to account for the tax by an individual, the PSA offers a measure of simplification.

A PAYE Settlement Agreement (PSA) allows you, as an employer, to make an annual payment to cover all tax and national insurance due on minor, irregular or impractical benefits and/or expenses for your employees.

A PSA settlement is a practical and flexible solution for dealing with this type of benefit, which must satisfy one or more of the following conditions:

  • Minor (but not trivial); or
  • Payable on an irregular basis; or
  • Payable in circumstances where it is impractical to apply PAYE or apportion the value of particular benefits which have been shared between a number of employees

Examples of payments which can usually be included in a PSA settlement are staff nights out, internal seminars and conferences which include generous, non- business elements and occasional gifts to staff.

If a PSA is agreed with HM Revenue and Customs, the items will not need to go through payroll or be included on a form P11D.

From the employer’s perspective, this is advantageous in that only one single calculation has to be done and they meet both their tax and national insurance obligations, and so does the employee. It also means that the employee receives the benefit free of tax.

To apply for a PSA, the employer (or their agent) needs to write to HMRC and advise of the details of the benefits they want to be covered within the PSA. The deadline for this is 6th July following the tax year-end.

If HMRC are in agreement, they will issue two copies of the agreement (P626) which needs to be signed and returned. HMRC will then authorise the request and return a copy to the employer.

Once the agreement is in place for 2018/19, the agreement will continue until either the company or HMRC cancels it. Previously, the PSA had to be renewed every year.

The employer is free to cancel or change the PSA at any given time provided they submit details of the changes or send the completed return slip section of the P626.

Overall, the PSA provides tangible benefits for both employer and employee. A huge amount of time is saved by the employer as the process of paying the taxes and national insurance on these types of benefits is much more simple.

It also offers an advantage for the employee in the sense that the beneficial nature is preserved as the employer pays the tax on the benefits on their behalf, so the employee doesn’t have to.

If you think your business should be making an annual PSA settlement, feel free contact Fiona Wheeler for more information either by clicking here or by calling 0161 477 2474.