Understanding What is A PAYE Settlement Agreement in The UK

In the UK, Pay As You Earn (PAYE) is the vital tax system used by HM Revenue and Customs (HMRC) to collect income tax and National Insurance Contributions (NICs) from employees’ wages or pensions. Under the working system of PAYE, employers deduct these taxes from employees’ salaries before they receive their pay. Accordingly, PAYE ensures the employees’ tax liabilities are settled in real time instead of being left for end-of-year tax returns. However, certain situations might occur wherein an employer may want to cover the tax liabilities of specific benefits or expenses provided to employees. This is where a PAYE Settlement Agreement (PSA) comes into the picture. Hence, this blog encompasses all the crucial aspects of what is a PAYE settlement agreement to help you understand how it can significantly reduce your administration, help with compliance, and help motivate your employees by settling their tax liability.

 

 

What is A Paye Settlement Agreement (PSA)?

It is not uncommon for many businesses to give benefits to their employees, including non-cash gifts, staff parties, one-off relocation packages, and so forth. While some benefits may fall under exemptions, several of them are subject to income tax and NIC payments, which are obligatory. So, how will the employer pay them? To address this question, a PAYE Settlement Agreement (PSA) is a special arrangement that allows employers to make a single annual payment to HMRC, covering the tax and NICs on minor, irregular, or impracticable benefits offered to employees. Consequently, employees do not have to settle the tax themselves since employers can simplify their tax reporting obligations on their behalf.

It is noteworthy that with a PSA, an employee will not have to declare and return the expenses and benefits as benefits in kind on P11D forms or in the payroll. As a result, all the benefits included in a PSA will not be included on a P11D form. To go further, a PSA is an administrative arrangement that is an ongoing settlement agreement with HMRC, staying in effect for future fiscal years unless the employer or HMRC modifies or terminates it. It implies that the employer has no requirement to renew the PSA each year.

How Does A Paye Settlement Agreement Work?

When learning what is a PAYE settlement agreement, you must also know that if you get a PSA for what HMRC has classed as minor, irregular, or impracticable benefits, you will not be required to:

• Cover them in payroll to calculate income tax and National Insurance for the employees.
• Report them in the end-of-year P11D forms.
• Pay Class 1A National Insurance on them at the end of the tax year. On the contrary, under the PSA, you will now have to pay Class 1B National Insurance on behalf of your employees.

Furthermore, as an employer, if you do not yet have a PSA contract in place, you must decide on one with HMRC and set it up by July 6, after the end of the tax year for which you gave the benefits to your employees. Finally, HMRC has facilitated the employees by sparing them the inconvenience of applying for a new PSA every year unless they add new items to the benefits.

What Can Be Included in A  Paye Settlement Agreement (PSA)?

The benefits that are to be included in a PSA constitute the most crucial part of learning what is a PAYE settlement agreement. Essentially, HMRC categorizes benefits into three types that qualify for a PSA:

Minor Benefits

The following benefits and expenses fall under the ambit of HMRC’s minor gifts:

• Low-value benefits, such as small non-cash gifts and staff parties exceeding the exempt limit.
• Occasional entertainment expenses, like tickets to an event.
• Incentive awards to acknowledge and admire employees’ strenuous efforts and consistency, such as long service.
• Telephone bills.
• Mall gifts and vouchers
• Non-business expenses incurred while travelling overnight on business that surpass the daily limit.

Please note that you do not include trivial benefits in your PSA. To know what comes under the trivial benefits, visit the government website.

Irregular Benefits

The benefits that are not given regularly, like on a weekly or monthly basis, are provided throughout the year. In addition, these are also the benefits for which employees do not have a contractual right, yet the employer provides these things to them. The following are the main examples of irregular expenses and benefits:

• One-off relocation expenses over £8,000 beyond the usual allowance.  It is worth asserting here that these expenses are tax-free below £8,000.
• The cost incurred when attending conferences abroad.
• Expenses for a spouse joining an employee overseas.
• Use of a company holiday flat.

Impracticable Benefits

Impracticable expenses and benefits are the items that are difficult to determine the value of or distribute among individual employees. For instance, impractical benefits are difficult to allocate or split to individual employees, such as shared expenses for corporate events or group travel perks. Other examples of impracticable expenses and benefits include:

• Staff entertainment that is subject to income tax or NICs.
• Shared cars.
• Personal care expenses, i.e., hairdressing.

What Cannot Be Included in A PSA?

While the above-stated benefits count as those qualifying for a PSA, you must also be aware of what stands ineligible to be reported as part of knowing what is a PAYE settlement agreement. Speaking specifically, the following benefits and expenses do not meet PSA criteria:

Employees Wages

First and foremost, wages are a fundamental right of employees, which are subject to tax and NI deductions and are covered through the company’s payroll. Therefore, they cannot be covered in a PSA.

Cash Payments Or Vouchers

Since cash payments must be reported through payroll and taxed as income, they cannot be included in a PSA. For greater clarity, cash payments include:

• Employee bonuses
• Round sum allowances
• Beneficial loans in a PSA

Large Or Regular Benefits

Benefits like company cars or medical insurance are reported on form P11D and not a PSA.

Expenses Already Covered By Other Tax Exemptions

If a specific expense or benefit has an existing tax exemption, which is likely to get modified later on, it should not be included in a PSA.

How To Get A PAYE Settlement Agreement?

After elaborating on what is a PAYE settlement agreement and what things do and do not qualify for it, we will now shed light on how an employer can get a PSA. The major steps are listed below to help employers obtain a PSA:

Visit HMRC’s Website

To get a PAYE Settlement Agreement, you can go to the government website and apply online. With HMRC’s new online application system in place, you can easily describe the expenses and benefits you want to cover on your PSA. Notably, while applying online, you will have to give relevant details, such as your three-digit employer PAYE reference, your business name, office address, and telephone number.  Moving further,  while you can get a PSA online, HMRC also allows you to apply by post. However, sending a form to HMRC via post has now become a less common method since the government is focusing on its Making Tax Digital scheme. As an alternative, you can also hire a professional accountant who will apply for a PSA form on your behalf. Nonetheless, take note that you will have to give them a signed letter of authority if they lack the authorisation to apply already.

Explaining further, you are allowed to cancel your PSA online at any time. HMRC will send you a confirmation email or letter in this regard. Similarly, if you’ve cancelled the application by post, you may get a P626 with the cancellation date. In addition,  you can also expect a confirmation letter from HMRC.

Outline The Benefits To Be Covered

Next, you will outright specify which minor, irregular, or impracticable benefits the agreement will cover. It is usually advised to keep descriptions of the benefits and expenses reasonably broad, as it will spare you the need to update them regularly. To illustrate, since the benefit of staff entertainment will incorporate parties, away days (which are not usually taxable), social events, etc, you will not be required to update them if, later on,  you decide to add in other taxable staff events.

Receive Approval From HMRC

Once you have submitted your PSA form online, HMRC will review the request to ascertain what you have included and will contact you in the event of any issues. Thereafter, HMRC will issue a formal PSA agreement if it approves the application.

Calculate Tax And NICS Due

Once a formal PAYE Settlement Agreement has been issued to you, you will need to provide calculations of the tax and NIC due. To clarify, the employer must calculate the grossed-up tax amount and Class 1B NICs based on the benefits included in their PSA.

Make The Payment Within the Deadline

Employers must ensure that PSA tax and NIC payments are made to HMRC by October 22 (or October 19 if paying by post/cheque) following the end of the tax year in which you provided the benefits applied for obtaining the PSA.  It is worth highlighting that late payments may result in penalties and interest charges. Hence, fulfil your PSA obligations on time.

You would have noticed that PAYE, payroll, and P11D have been often mentioned in this guide because you might want to get a thorough read on them as well. To this end, our following guides are comprehensive enough to give you all the vital details on the topics at hand:

• What is payroll and how does payroll work?
• What is PAYE and why is it important?
• How to calculate pay as you earn tax​ (PAYE)?
• What is a p11d from and why is it important in the UK?

 

 

Conclusion

In conclusion, understanding what is a PAYE Settlement Agreement is significant for employers since it offers employers a convenient way to cover the tax payable on minor, irregular, or impracticable benefits without burdening employees. It not only simplifies tax administration but also ensures compliance and cultivates better employer-employee relations. Nonetheless, it is crucial for employers to remain heedful of what qualifies for inclusion in a PSA and meet all reporting and payment deadlines to avoid penalties. Alternatively, if delving into all the important facets of a PAYE settlement agreement does not appeal to you, certified professionals at Payroll Services Accountants can deal with PAYE settlement agreements for you. Businesses can benefit from affordable yet certified payroll professionals who can help employers manage PSA applications, tax calculations, and compliance with HMRC requirements, ensuring smooth payroll processing and tax reporting. Therefore, contact us today to delegate your payroll tasks to us, and we will streamline your payroll obligations efficiently.

Disclaimer: Please note that the information provided in this blog is exclusively for informational purposes and should not be considered financial advice. Always consult with a professional accountant to ensure compliance with UK laws and regulations.