For busy small businesses, a PAYE Settlement Agreement (PSA) can be advantageous when it comes to meeting your employer obligations.

What is a PAYE Settlement Agreement?

A PSA allows employers to make one annual payment, to cover all the tax and National Insurance due on minor, irregular or impracticable expenses or benefits that are provided to their workforce.

According to HM Revenue & Customs (HMRC), where an employer has a PSA in place, the values associated with the relevant benefits and expenses will not need to be put through payroll or included on P11D forms.

Furthermore, employers will not be required to pay Class 1A National Insurance on the benefits at the end of the tax year, since you pay Class 1B National Insurance as part of your PSA instead.

Why opt for a PSA?

If you often find yourself spending precious time totting up minor taxable expenses, such as employee entertainment, birthday presents or incentives, then applying for a PSA could help you to cut back on the associated administration, and to ensure that nothing slips through the net!

What expenses can be included under a PSA?

Minor expenses

Minor expenses can be included under a PSA; typically, birthday presents, health club memberships, expenses deemed to be personal yet incidental, or even a present, flowers, or a voucher should an employee fall ill.

Irregular expenses

Irregular expenses could include:

  • Relocation expenses exceeding £8,000 (these are tax-free below £8,000)
  • The cost of attending an overseas conference
  • Use of a holiday flat, owned by the company

Impracticable expenses or benefits

Impracticable expenses or benefits are those that are difficult to place a value on, or to divide up between individual employees, for example:

  • Staff entertainment that is not exempt from tax or National Insurance Contributions
  • Shared cars
  • Personal care expenses (i.e. hairdressing)

How to apply for a PSA

To apply for a PSA, you will need to contact HMRC with a description of the benefits or expenses that you believe are covered.

Once you reach an agreement as to what can be included, HMRC will send you two draft copies of form P626, which you will need to sign and return.

HMRC should then authorise your request and return a form to you – this is your PSA. The PSA will remain in place until such time as you request otherwise.

It is prudent to calculate the total tax and NI owing using form PSA1 and provide this information to HMRC promptly after the end of the tax year. If you do not do this, HMRC will calculate the amount due on your behalf, and you may find that the resulting liability ends up being higher than it otherwise would have been.

You can expect HMRC to be in touch with you before 19 October, following the tax year that the PSA covers, to confirm the amount payable.

Benefits and expenses outside the scope of a PSA

Anything that falls outside of the scope of a PSA, and so cannot be included, must be reported using form P11D. However, you are not required to submit a P11D if you are already paying employees’ expenses and benefits through your payroll.

How can George Hay help?

If you need support with reporting benefits and expenses correctly, whether via a PSA, P11D or by putting them through your payroll, we can assist you to ensure you are always compliant with HMRC’s requirements.

If you do need support with arranging a PSA, and you are not already using our taxation or payroll services, you will need to give an agent (i.e. us) a signed letter of authority to undertake this on your behalf.

For more information, or to discuss how we can help you, contact our team today.

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