What is a PAYE Settlement Agreement (PSA)?
A PSA is a formal agreement between an employer and HMRC that allows the employer to settle the income tax on certain employee benefits and expenses by making one annual payment to HMRC. The employer pays the tax on behalf of employees, and also pays employer National Insurance (Class 1B) on the relevant amounts. This avoids having to include the items on employees’ P11Ds or process each item through payroll individually.
When is a PSA appropriate?
A PSA is used for benefits that are minor, irregular, or impracticable to report on a per-employee basis. Typical examples include:
- Staff entertainment that doesn’t qualify for an exemption, or where it is impracticable to apportion cost.
- Relocation expenses or overseas conference costs (spouse/partner travel).
- Use of employer holiday flat, shared cars, or benefits that are hard to value or divide up.
A PSA is not appropriate if the benefit is regular, part of contractual pay, or already reportable in payroll in a straightforward way.
What’s commonly excluded or already tax-free
Before setting up a PSA, check HMRC exemptions—many small perks are tax-free.
Trivial benefits: Where the cost per employee is £50 or less—not cash/cash voucher, not contractual, and not reward for work—these costs are exempt from tax, NI, and reporting.
Employer annual social function: If the event is open to all, is annual, and costs £150 or less per head (including VAT), it is exempt. On the contrary, if it costs more than £150 per head, then the whole event is taxable.
If claims fall under these exemptions, a PSA is usually unnecessary.
Practical steps on how to set up a PSA
- Identify which benefits or expenses need to be covered and group them into categories, as per HMRC rules.
- Apply to HMRC. You must notify HMRC that you want a PSA for a tax year. The agreement, once agreed, normally rolls forward each year unless changed.
- Record the value of benefits and which employees received them. Split these by the tax band, where required. You’ll need detailed records to calculate the PSA liability accurately.
- Submit the PSA calculation to HMRC. HMRC recommends sending PSA calculations by 31 July following the end of the tax year so they can verify and issue a payslip. HMRC prefers receiving calculations with a PSA1 form. You can send a PSA1 form online by using your Government Gateway credentials.
- Pay HMRC the agreed tax and Class 1B NIC by the payment deadline.
PSA deadlines for reporting and payment
HMRC application or notification: You should apply before using a PSA for a tax year or notify HMRC by the statutory deadline (5 July) following the first tax year it applies to. Once agreed upon, a PSA normally continues year to year until changed.
Pay by: The PSA tax and Class 1B NIC must be paid to HMRC by 22 October following the end of the tax year (19 October if you pay by post). If you do not submit calculations, HMRC can’t verify the correct amount, so follow the recommended process.
Tip: HMRC provides a PSA payslip once they process your calculation. Quote the charge reference when paying.
