11 June 2024

Sudeep Ganguli, employment taxes senior manager at PSTAX, discusses pay as you earn (PAYE) settlement agreement (PSA) considerations for employers


Now the 2023/24 tax year has ..ended there are various tasks be ..done, which include the return of taxable benefits and expenses. For employers this usually means completing P11D returns, although it’s now becoming more popular to payroll benefits given it will soon become mandatory. The deadline for submitting 2023/24 P11D returns is 6 July 2024. The deadline for arranging a PSA with HM Revenue and Customs (HMRC) is 5 July following the first year it applies to.

 

What is a PSA?

A PSA is a formal agreement between an employer and HMRC which allows the employer to make one annual payment to cover all the tax and National Insurance contributions (NICs) due on minor, irregular or impracticable expenses or benefits for its employees. The advantage for employers is that there’s no requirement to complete P11D forms for these particular expenses or benefits, or to process the payments via payroll. This certainly saves time and is a practical solution to deal with certain benefits, such as rewards for staff where it would be inappropriate to ask the employees to pay the tax. This could include recognition schemes where there is a reward (say a non-cash voucher) for top performing staff.

Despite the convenience and advantages of a PSA, it’s important to bear in mind the financial cost. The tax due on the taxable benefits or expenses included in a PSA is grossed up at the marginal tax rate of the relevant employees and there’s also the class 1B NICs to factor into the total budget. The class 1B NICs total is calculated on two elements – the cost of the benefits and expenses, as well as on the grossed-up tax figure.

 

What can be included in a PSA?

HMRC’s guidance explains that to include expenses and benefits in a PSA they must be minor, irregular or impracticable. Here are some examples of each of these categories:

Minor

Incentive awards or recognition schemes, telephone bills, small gifts and vouchers, staff entertainment (for example, team meals or sporting or arts tickets) or expenses in excess of HMRC limits, etc.

Irregular

Irregular benefits and expenses include items that aren’t paid at regular intervals and employees don’t have a contractual right to, like relocation expenses over the £8,000 limit, expenses of a spouse / partner accompanying an employee abroad, use of a company holiday flat, etc.

Impracticable

Impracticable expenses and benefits are items that are difficult to place a value on to apportion between individual employees, like staff entertainment costs, shared use of company cars, personal care expenses, etc.

Note that the following items cannot be included in a PSA:

  • salary / wages
  • high-value benefits like company cars
  • cash payments e.g. employee bonuses, round sum allowances, beneficial loans, etc.   

It’s worth pointing out that if an employee incurs a taxable expense – for example, a long service award or influenza vaccination – but is then reimbursed in cash, the payment cannot be included in a PSA. It would need to be paid via payroll with PAYE / NICs deducted.

 

How to apply

The easiest way to apply for a PSA is online via HMRC’s portal using this link: https://ow.ly/c8ci50RFOeR.

Alternatively, employers can write to HMRC and apply for a PSA with details of the items to be included, at the following address:

PAYE Settlement Agreements

HM Revenue and Customs

BX9 2AN.

For either type of application, HMRC will agree what can be included and send two copies of form P626, which need to be signed and returned. HMRC will send back one copy of the P626 form. This is your formal PSA.

 

Calculating the tax and NICs due for the PSA

HMRC has issued some guidance on how to calculate the tax / NICs due for the PSA: https://ow.ly/sEYQ50RFOnZ.

PSTAX and our clients have found that HMRC’s online PSA forms and support are easy to use and generally cover most scenarios employers will have for the items to be included in their PSA.

 

Deadlines

As already mentioned, if there are expenses and benefits for 2023/24 that you want included in a PSA please apply as soon as possible, as the deadline for setting up a new PSA (or adding to an existing one) is 5 July 2024.

The deadline to send in the PSA calculations to HMRC to check is usually 31 August.

The deadline for employers’ 2023/24 PSA payments to HMRC is 19 October 2024 or 22 October 2024 if paying electronically.

 

Cancellation of a PSA

Finally, a quick reminder to employers that if you have set up a PSA, it will continue to apply until it’s cancelled. Where a PSA calculation has been submitted for a particular year, HMRC will continue to raise charges in subsequent years. This is often with an inflationary uplift, where no further calculations are submitted, such as where a benefit has ceased. This has led to several clients being chased for debts they didn’t expect.

If you do have a PSA for items that aren’t expected to continue, please remember to either submit a ‘nil’ return to HMRC for the following year or to cancel the PSA altogether. These can both be done using HMRC’s online service (using the link above), or by post / email. 


 

This article featured in the July - August 2024 issue of Professional.