The PAYE Settlement Agreement (PSA) is an administrative arrangement by which employers pay the tax and National Insurance Contributions (NICs) on various expenses and benefits for their employees direct to HMRC at the end of each tax year. This happens instead of the tax being included in payroll or being returned as benefits in kind on form P11D.
How Does It Work?
A PSA is effectively a simplified way for employers to report certain benefits and expenses to HMRC. To apply for a PSA, the employer simply needs to write to
HMRC Local Compliance Individuals and Public Bodies,
… with the details of the benefits or the expenses they wish the PSA to cover.
If the application is accepted, HMRC will issue two copies of form P626 for the employer to sign and return, after which the employer can submit a calculation to HMRC based on these costs, and pay the gross tax and NICs by the 22 October the following tax year.
As of April 2018, the PSA process became even simpler, as the PAYE Settlement Agreement will only need to be applied for once by the employer and will then run year on year until the employer or HMRC chooses to cancel or change it. Previously, the annual agreement had to be renewed each year, a process which could be off-putting to busy companies.
What Is Included On A PSA?
In order to be included on a PSA, a cost must stick to three criteria:
This essentially relates to how much the item costs, but there are no set-in-stone amounts to define this. An item must be considered objectively minor in value to be included on a PSA, meaning that things like non-cash gift vouchers given as rewards might be suitable, but a large bonus would not.
A payment or benefit which is given to staff members on a schedule or regular basis would not be suitable to include on a PSA. Employers should only include items which are one-offs or fairly rare incidences, such as travel to a special event or conference, for example.
This means that the item would be difficult to include in PAYE, due to not being able to accurately work out exactly how much the benefit was worth to each employee. A good example of this is an annual meal, where the overall bill was shared between many employees.
Examples Of What Might Be Included On A PSA are
- Prizes or incentives
- Staff entertaining such as a year-end dinner or party
- Gym subscriptions
- Benefits shared between a large number of employees
- Business phone bills
What Are The PSA Deadlines?
To apply for a PSA, you need to contact HMRC before 5 July following the end of the tax year. So, for example, if you want to apply for a PSA for benefits and expenses incurred during the 2019/20 tax year, you would have to apply for a PSA by 5 July 2020.
Any tax and National Insurance owed under a PSA needs to be paid by the 22 October following the end of the tax year, or 19 October if you pay by post. If you miss the deadline, you may be charged interest or penalties by HMRC.
If you don’t have a PSA in place and miss the deadline to apply for one, but still wish to pay tax in this way, you may be able to make a voluntary disclosure and settlement to HMRC. However, you should be aware that in some circumstances you will have to pay a penalty for doing this.
How To Calculate The Tax Due
In order to calculate any tax or NIC due on your PSA, you will need to have the following available to you:
- The total value of the benefits/expenses for each PSA category agreed between yourself and HMRC
- The number of employees who received each benefit
- The number of employees in each tax rate band
- The value of the benefits or expenses to the employees in each different tax band
Since these benefits and expenses have not had tax deducted at the time of payment the amount of the tax to be paid through an agreement has to be “grossed up”. Some examples will help …
Calculating Tax Due
On a £60 Christmas gift, an employee paying the standard rate of tax (20%) would incur tax of
£60 x (100-20) x 20 = £15
Whilst an employee on the higher rate of tax (45%) would incur tax to the tune of
£60 ÷ (100-45) x 45 = £49.09
So, the income tax cost to the employer for both gifts would be £15 + £49.09 = £64.09
Calculating National Insurance Due
National Insurance Contributions are worked out according to the gross amount. For an employee on the standard tax rate, the £60 gift cost, in total, the net amount plus tax
£60 + £15 = £75.
Employer NICs on this amount are
£75 x 13.8% = £10.35
whilst employee’s NICs are
£75 x 12% = £9
The total cost to the employer would be £94.35, which comprises of: The gift £60, tax on the gift £15 and NICs of £10.35 and £9.
Should You Apply For A PSA?
Before you apply for a PSA it is worth taking a look at your accounts and expenses for the previous year to work out exactly what you would include on one, and identify any costs which might actually be exempt from tax such as long service awards, annual parties and meals, training and trivial benefits.
A PSA is a great way to ensure HMRC compliance and simplify the calculation of tax,, but some employers will find that they simply do not have enough allowable expenses to include in the agreement to make it worth their while.
If you do decide to go ahead with a PSA, though, they offer excellent benefits for staff morale, ensuring that the employee doesn’t suffer a tax charge on the benefit-in-kind from perks and benefits of their job. A PSA may also help with cash flow, offering a chance to pay tax and NICs at a different point in the financial year compared to the deadlines required for payroll and year end calculations, even though the amount does tend to be fairly small.
Finally, any tax and NIC payable on a PSA is considered an allowable deduction, meaning that it can be set against your taxable profits for the year.
Advising businesses on taxation matters such as these agreements is an everyday occurrence for the experts at THMC. If you need to find out more about this, or wish to have a conversation on anything accountancy related, then please call us on 0800 470 4820 or email [email protected].