PSAs – ensure you don’t over declare

25 May 2022

Angela Ferguson, director – employment taxes at PSTAX discusses pay as you earn settlement agreements (PSAs) ahead of the deadline

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Now is the time when many employers will start to gather information for the preparation of their PSA calculations, ready to be submitted to Her Majesty’s Revenue and Customs (HMRC). This can be an onerous task, trawling through various purchase ledger codes over the tax year to extract the information needed. This article covers a reminder of the basic requirements and highlights the available exemptions and other possible tax efficiencies.

For those that aren’t aware of what a PSA is, it’s an agreement with HMRC, where the employer agrees to pay the tax and National Insurance contributions (NICs) on certain payments or rewards they’ve provided to their employees. Categories are agreed and reported on annually. To be accepted as a qualifying category, the expenses must be minor, irregular, or impracticable.

 

What can you include in a PSA?

Some examples of minor benefits and expenses include:

• incentive awards, for example, long service awards, that don’t meet the exemption conditions or exceed the statutory £8,000 limit

• phone bills

• small gifts and reward vouchers

• staff entertainment

• incidental overnight expenses that are over the daily limit, while travelling overnight on business.

Irregular benefits and expenses are items that aren’t contractual, which aren’t paid at regular intervals over the course of a tax year, for example, weekly or monthly. Examples include:

• relocation expenses that don’t meet the exemption conditions

• the cost of attending overseas conferences

• expenses of a spouse accompanying an employee abroad.

• Impracticable expenses and benefits are items that are difficult to place a

• value on, or to easily split between individual employees.

Examples of impracticable expenses and benefits include:

• staff entertainment that isn’t exempt from tax or NICs

• shared cars

• personal care expenses, for example, hairdressing.

In a PSA, you can’t include items such as cash payments, wages or high-value benefits like company cars, accommodation and beneficial loans.How often do you agree PSAs with HMRC and when should they be submitted?

The agreements are now enduring, meaning you don’t have to renew them every year, which was previously the case. It’s advisable to agree the categories prior to the end of the tax year. We are, however, aware of current delays in HMRC’s PSA team responding to requests.

Typically, HMRC requests the calculations by 31 July following the tax year, although this isn’t a statutory deadline. The calculation and payment must be sent to HMRC by no later than 19 October (22nd when paying electronically) following the tax year in question.

 

How exaxtly does the PSA calculation work?

As part of the calculation, you must inform HMRC of the split of basic rate, higher rate and additional rate taxpayers (also noting any Scottish or Welsh taxpayers). This can be done on a best estimate basis where it’s too difficult or time consuming to be specific per employee.

There’s much debate about how to treat employees who pay no tax, as their income could be covered by their personal allowance. Therefore, some employers have utilised an effective tax rate of 0% when calculating their PSA liabilities.

However, HMRC has changed guidance in its PSA manual, basically stating there is no 0% banding, as follows: ‘Where an employee pays no tax with the employer, they should be included as being liable at their first chargeable rate of tax, the basic rate if England / Northern Ireland, and Wales, and starter rate if resident in Scotland, for PSA calculation purposes.’

We’ve heard of HMRC investigations taking up this point and recovering tax at the basic rate for previous years; however, HMRC’s position is subject to challenge.

Taking into account the appropriate tax rates, tax is payable on a grossed-up basis with a special category of NICs (class 1B), payable on the value of the benefit and the grossed-up tax liability.

 

Remember the exemptions available

In calculating the value of the benefits to be included within the PSA, it is important that you remember not to over declare and to maximise the available exemptions.

The key exemptions to consider are:

• trivial benefits
  • these are non-contractual items, under £50 in value which aren’t a reward for service
  • they cannot be cash payments, but note that HMRC has accepted employer reimbursements for covid vaccines into PSAs
  • this could apply to small gifts given as a gesture of goodwill, e.g., special birthdays, retirement, significant anniversaries, giving birth etc.
• annual functions
  • they have to cost £150 or under per attendee and note that this attendee count can include partners / spouses of non-staff
  • it must be an annual event and open to all staff
  • if your organisation has more than one location, an annual event that’s open to all your staff based at one location still counts as exempt. You can also host separate parties for different departments / regions, if all your employees can attend one of them
  • this can cover more than one annual event, providing all costs are at, or under, the £150 per head limit. The cost per head of subsequent functions should be added. If the total cost per head goes over £150, then whichever functions best utilise the £150 are exempt, and the others will be taxable
  • this exemption could apply to annual award events, provided that all staff have the right to attend. Note, the awards themselves may not qualify as exempt if they relate to performance.
• long service awards (LSAs)
  • the award cannot be cash and it must mark at least 20 years’ service
  • it cannot be more than £50 per year of service
  • the recipient cannot have received another LSA in the last ten years. So sometimes, employers will give awards at five years, ten years, 20 years and 30 years, for example. Please note that as long as there is a ten year gap between the awards, the 20 and 30 year awards could potentially be exempt, assuming they meet the other conditions. The five- and ten-year awards would be fully reportable on the PSA.
• staff meals in the workplace
  • you don’t have to report any free or subsidised meals of a reasonable value at a workplace canteen, nor if you provide vouchers that cover the cost of buying these meals or otherwise on the premises. The facility must be available to all staff, but the level of subsidy doesn’t have to be the same for all employees for the exemption to apply
  • please note that HMRC doesn’t accept that meals provided in a pub or restaurant close to the workplace would qualify because it’s open to the public
  • so you could, as a tax-free benefit, provide a sandwich lunch for all employees, every day, if it’s provided in-house and is reasonable in value.
• relocation costs
  • qualifying relocation costs up to £8,000 are exempt from reporting. These include:
    • the costs of buying or selling a home
    • transporting the employee’s belongings to the new home
    • associated travel and subsistence costs
    • buying certain things (domestic goods) for a new home
    • bridging loans.
  • generally, the common exempt expenses are fees in respect of the house sale, including estate agent fees, related costs in acquiring a new home, including stamp duty land tax and costs of replacing domestic goods, if the goods used in the old home are unsuitable for installation in the new home
  • these are only qualifying costs when:
    • a new employee is moving area to start a job with you
    • an existing employee is changing their place of work within your organisation
    • the employee’s new home is reasonably close to the workplace and their old home isn’t
    • the costs are paid before the end of the tax year, that is, after the one in which the employee started their job. For example, if an organisation moved its premises from London to Reading in June 2022, you would have up until 5 April 2024 to take advantage of the allowance.
• travel and subsistence to / at a temporary workplace
  • it’s important to remember that any associated costs for travel to a temporary workplace are exempt. This includes the costs of travel such as the employee’s train fare or mileage reimbursed via expenses, together with any hotel accommodation
  • the key is ensuring that this is, in fact, a temporary workplace. For tax purposes, a temporary workplace is a location which an employee attends for a length of time which lasts, or is expected to last, for less than 24 months. If an employee performs their duties to a significant extent (more than 40% of their time) at one workplace, for more than 24 months, then this can be classed as a permanent workplace.
• incidental overnight expenses
  • these are payments that you make as an employer for an employee’s personal expenditure, up to certain limits, when they stay away from home for at least one night during a business journey, for example, buying newspapers, laundry, phoning home. The maximum amounts that may be paid without any tax consequences are:
    • £5 a night for each night away during business journeys anywhere in the UK;
    • £10 a night for each night away, during business journeys outside the UK.
• Covid tests
  • It’s recently been announced that employer provided or employer reimbursed costs for the provision of Covid tests are exempt.

Care is needed if any of the above items are provided via a salary sacrifice scheme, as they will no longer be exempt.

 

Other ways to make the PSA process more efficient

Leaving the task to the end of the tax year can make preparing a PSA so much harder. Ideally, the information should be collated quarterly, so if there are queries about an expense, it will be fresh in the mind of the claimer, should any further investigations be necessary.

Some employers can flag purchase ledger codes as PSA items, at the time of inputting the expense, which makes end of year reporting easier.

Doing a final check once the P11D forms have been completed can ensure nothing has been missed reporting-wise and can be picked up in the PSA reporting process if required.

Should anyone need any support or advice, feel free to get in touch with me or your usual PSTAX contact. 

• Magazine article

 

Featured in the June 2022 issue of Professional in Payroll, Pensions and Reward. Correct at time of publication.