A PAYE Settlement Agreement (PSA) is currently an annual agreement made with HMRC, which allows employers to settle the tax and National Insurance (NI) due on small or irregular taxable expenses or benefits provided to employees.
The agreement must be put in place with HMRC by 6 July following the end of the tax year you are looking to report benefits for, so for the 2019/20 tax year, the agreement should have been in place by 6 July 2020. It is no longer necessary for annual applications, any applications in place for the 2018/19 tax year will roll forward into subsequent tax years. You will only be required to contact HMRC if you would like to add anything to your agreement or if you wish to withdraw your agreement with HMRC.
The tax and NI due in relation to the PSA calculation should be settled to HMRC by 19 October if paying by cheque, or 22 October if paying online.
The tax due is calculated on a grossed-up basis at the employees’ marginal rate, given that the employer meeting the tax is seen as a further benefit. Class 1B employer NI is then calculated on the benefit value plus the grossed-up tax, making a PSA quite expensive for employers.
Items included in a PSA do not require any further reporting on forms P11D or on employees’ tax returns.
Items that can be included in a PSA must fall into one of the following categories:
- Minor items e.g. a small birthday present or Christmas gifts
- Irregular items e.g. relocation expenses in excess of the £8,000 tax exemption threshold
- Items it’s impracticable to operate PAYE on or determine a value for P11D purposes e.g. staff entertaining and shared benefits such as shared cars or taxi journeys that are difficult to attribute to individual employees
Examples of items that cannot be included in a PSA would be:
- Cash payments including salary, wages, bonus and other payments such as long service awards, in excess of the exemptions
- Round-sum allowances
- Large benefits provided regularly to individual employees, such as company cars or beneficial loans
There are some useful exemptions that can be utilised in relation to common PSA items and these should be considered to determine how your overall liability can be reduced. These include:
- An exemption for annual staff functions open to all employees costing less than £150 per head. This is an area that can often get confused as this is a combined limit, not a per event exemption and is a key area HMRC will focus on in any PAYE compliance review.
- A £50 per year of service exemption where a long service award is given in respect of an employee with 20 years of service if they have not had a long service award in the previous 10 years. The second part is critical for the exemption to apply.
- An exemption for trivial benefits provided to employees costing less than £50 whereby further specific criteria are met (including not being cash or a cash voucher, contractual or a reward for services).
- A gift made on personal grounds or as a mark of personal esteem, for example the gift to an employee on their wedding or birth of a baby.
Further complications have arisen for 2019/20 with the introduction of the Welsh tax rates. HMRC will now require your PSA calculation to be shown separately for UK, Scottish and Welsh taxpayers which add another level of administrative burden to employers.
If you require any assistance with preparing your PSA calculation for 2019/20 or require advice on the exemptions available and how to apply these, please contact Karen Groat, or your usual AAB contact.