Some benefits are awkward to put through payroll or a P11D: a staff party slightly above the exempt limit, gifts at Christmas, a taxi home after late working, or travel costs for an occasional visit to a temporary workplace that turned out to be permanent. A PAYE Settlement Agreement (PSA) lets the employer pay the tax on them itself.
What can be included
Items must be:
- minor (small gifts, small non-cash vouchers, staff entertainment); or
- irregular (occasional costs of a spouse accompanying an employee abroad, one-off relocation costs above the exemption); or
- impracticable to apportion or value per person (shared transport, staff events where attendees vary).
Salary, cash bonuses, company cars and large regular benefits cannot go into a PSA.
Deadlines
| Step | Deadline |
|---|---|
| Agree the PSA with HMRC (once in place it continues each year) | 5 July after the end of the tax year |
| Send the PSA calculation | after the tax year, usually with HMRC in time for payment |
| Pay the tax and Class 1B NIC | 22 October (electronic) or 19 October (by post) |
HMRC’s guidance on PAYE Settlement Agreements explains the application.
The calculation
Because the employer pays the employee’s tax, the value of the benefit is grossed up: the tax itself is a further benefit. The calculation is done at each employee’s marginal rate (basic, higher, additional, or Scottish rates for Scottish taxpayers), so the employer needs to know which band each recipient falls into. Class 1B NIC is then due on the total of the benefits and the grossed-up tax.
Example: £8,000 of staff entertainment for 40 employees, all basic-rate taxpayers. Grossing up at 20% gives tax of £2,000 (£8,000 × 20/80). Class 1B NIC is charged on £10,000.
Bookkeeping
- Post the underlying costs to the normal expense accounts during the year.
- At the year end, accrue the expected PSA tax and Class 1B as a staff cost and a liability.
- The PSA payment is deductible for corporation tax in the period it relates to only if it meets the normal timing rules; agree the treatment with the accountant.
Records
Keep for each tax year:
- the PSA agreement letter (P626) and any changes;
- lists of the items covered, the cost, the number of recipients and their tax bands;
- the calculation sent to HMRC and the payment confirmation.
PSA or something else?
Check the exemptions first: the annual staff function exemption, trivial benefits and certain travel exemptions may remove the need for a PSA altogether. Items not covered by an exemption and not suitable for a PSA go on the P11D or through payroll. See trivial benefits and P11D and company benefits.