PAYE settlement agreements (PSAs) are widely used by employers to ensure compliance around employee expenses and benefits processes. By entering into this formal arrangement, an employer can settle any tax due on expenses and benefits provided to employees by way of an annual submission and payment to HM Revenue & Customs (HMRC).
Items that are included in a PSA are not then required to be reported separately, for example via the payroll or in the employee’s P11D. Instead of being taxed to the employee via the P11D process, they are taxed to the employer through this annual settlement.
Furthermore, rather than Class 1A National Insurance contributions (NICs) being due via the P11D(b), the value of the benefits is subject to Class 1B NICs.
What are the benefits of a PSA?
As mentioned above, a PSA is a useful tool to help facilitate the provision of benefits to employees, without the employee having to foot the tax cost. For example, employees wouldn’t expect to find the cost of a staff function or staff gift being included on their P11D form.
A PSA can also help to reduce administration for the employer, by eliminating the requirement to include certain taxable expenses/benefits on employee P11Ds and replacing it with an annual settlement to HMRC.
Another, often overlooked, advantage of a PSA is a reduced exposure to penalties and interest. It can be difficult to keep track of the tax reporting requirements of all the expenses being paid to employees throughout the year. This can lead to easy pickings for HMRC at the inevitable employer compliance visit. A PSA allows you to undertake a review at the end of the year to ensure you have picked up all those taxable items. It can also help you to demonstrate to HMRC that you understand the issues and you are taking your compliance arrangements in this area seriously.
How do we get a PSA?
A PSA is a formal arrangement, applied for in writing, between employer and HMRC. The deadline to apply for a PSA is 5 July following the end of the tax year to which it relates. However, the PSA cannot apply retrospectively to expenses or benefits that should have had PAYE applied to them. Best practice is therefore to agree a PSA prior to the start of the tax year, to ensure all the items that you intend to include can be included from the outset.
Once a PSA is agreed with HMRC, it will remain in force for future tax years until varied or revoked by HMRC or the employer.
What can we include in a PSA?
In order to be included in a PSA, the item must be:
- Regular; or
- Difficult to allocate a value to individual employees/operate PAYE as strictly required.
Examples of taxable items that can be included in a PSA are:
- Staff lunches/ meals and entertainment;
- Fitness centre subsidies;
- Travel/hotel expenses;
- Relocation expenses;
- Long service awards and staff prizes; and
- Trivial benefits over £50, such as wedding, birthday or Christmas gifts.
HMRC’s published guidance states that a PSA cannot include cash payments or major benefits in kind. Examples of items that cannot be included in a PSA are:
- Cash bonuses;
- Low interest loans; and
- Company cars.
What tax rate should we use?
The value of the benefits provided should be taxed within the PSA at the marginal tax rates of each employee concerned. Importantly, it is therefore necessary to also consider the tax rates applicable to employees resident in each of the countries of the UK, since the devolved governments are able to set the rates of income tax payable by taxpayers resident in those countries.
Also, you should be aware that, as the company is settling a tax liability on behalf of its employees, this represents a further benefit and so the tax due is calculated on a grossed-up basis.
What about filing and tax payment deadlines?
An employer will be required to submit a calculation to HMRC annually of the income tax and Class 1B NICs due. HMRC will review the calculation and confirm agreement if the basic calculation appears to be in order.
To manage its resources, HMRC requests the calculations are submitted annually by a certain date, which can differ by agreement, but is typically 31 July or 31 August.
It is worth noting, however, that there is no statutory deadline for the submission of the calculations, so no penalties can be imposed for failure to submit your calculation by this date.
There is a statutory deadline for payment of the tax and National Insurance due. This date is 19 October. Failure to pay the tax due by this date is likely to result in penalties and interest being charged.
We already have a PSA. Should we be doing anything differently?
Employers that have had a PSA in place for several years can often benefit from a review of their process to ensure they are paying the right amount of tax and National Insurance. We regularly see examples of companies simply following the process they have followed in prior years, without taking account of all the changes in tax rules. This can lead to unexpected exposures or overpayment of tax and National Insurance.
How can Saffery help?
If you do not already have a PSA agreement, our employment tax specialists can help you to set one up, liaising with HMRC to ensure the agreement includes everything you require.
We can also provide different levels of support, from analysing your expenses data and completing the PSA calculations, through to managing the entire process on an outsourced basis.
If you already have a PSA, we can review your existing PSA process to ensure you are taking advantage of all applicable exemptions and, ultimately, paying the correct amount of tax.
For any further queries on any of the issues raised here, please get in touch with your usual Saffery contact or speak to Stuart Daltrey.