06 August 2024

In cases where an employer provides a reward to employees and feels the tax and national insurance liability shouldn’t be imposed on the employee, or where it would be impractical to do so, a PSA allows employers to cover the liability on behalf of the employee.

The employer reports and makes one annual payment to cover all the liabilities on minor, irregular or impracticable expenses or benefits.

What is meant by minor, irregular or impracticable?

Minor expenses or benefits have no monetary limits to define the valuation of ‘minor’. Examples would be:

  • gifts for significant events, i.e., marriages, a new child, moving house
  • telephone bills
  • long-service awards which don’t meet the tax exemption within Income Tax (Earnings and Pensions) Act (ITEPA) 2003 section 323.

Irregular expenses or benefits are those that, as the name implies, are paid at irregular intervals. This means they would be difficult for an employer to keep a track of and report on. Some examples would be:

  • using an employer’s holiday home
  • relocation expenses (over the exemption at ITEPA 2003 Chapter 7).

Impracticable expenses and benefits are those that would truly be impractical to determine the value of the reward. HMRC’s guidance states employers “must demonstrate that they cannot follow normal procedures without a disproportionate amount of effort or record keeping. It is not sufficient for an employer merely to claim that is inconvenient or difficult to follow normal procedures.” Some examples here would be:

  • attendance to a corporate hospitality box
  • shared meals or taxis.

Certain things cannot be included on a PSA, such as cash payments, bonuses, round sum allowances, beneficial loans and high-value benefits, like company cars.

How to apply for a PSA?

An employer can apply directly to HM Revenue and Customs (HMRC) for a PSA, or an agent can do so on their behalf.

The easiest way is to apply online using a Government Gateway user ID, but you can also apply by post. Details of both options can be found here - https://www.gov.uk/paye-settlement-agreements/how-to-get-a-psa.

Let’s calculate what’s due

Once you have an approved PSA, you will need to complete a PSA1 form and provide the following details to HMRC:

  • the value of the items on which tax and Class 1B NICs is chargeable
  • the total number of employees in receipt of each specified amount
  • the number of those employees chargeable to each specified rate of tax
  • a computation of tax and Class 1B NICs calculated.

The rate of Class 1B NI for the 2023-2024 tax year is 13.8%.

The tax rate for an employee will be:

  • the basic rate
  • both the basic rate and the higher rate
  • the basic rate, the higher rate and the additional rates
  • any Scottish rate applicable, or
  • any Welsh rate applicable.

A key thing to note is, for any individual who doesn’t pay tax, they need to be included as paying the first chargeable rate of tax. Therefore, the employer will end up paying income tax on this persons reward, even if they are paid under the personal allowance.

HMRC publish a useful guide with working examples, which you can find here - https://www.gov.uk/government/publications/gfc1-2022-guidelines-for-compliance-help-with-paye-settlement-agreement-calculations/gfc1-2022-help-with-paye-settlement-agreements-psa.

Can I change my PSA once it’s approved?

Yes you can. If you need to change or cancel an approved PSA, you can do so online or by post. Details of both options can be found here - https://www.gov.uk/paye-settlement-agreements/change-or-cancel-a-psa.

Key dates to be aware of

You can apply for a PSA at any point before 6 July following the end of the tax year in which you wish the rewards provided to employees to be covered by the PSA.

Once you have applied for a PSA and it’s been approved, you don’t need to renew the PSA each year if the items you wish to have covered haven’t changed.

Payments

You must pay any owed tax and NI to HMRC by 22 October (19 October if not paying by electronic transfer) after the tax year the PSA applies to. You may of course, pay earlier than this date if you so wish.

If you don’t pay, or pay your owed liabilities after the above dates, you may be fined or charged interest.

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*This article was written by Samantha O’Sullivan, Policy and Advisory Lead, for AccountingWeb, July 2024.


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