What is a PSA (PAYE Settlement Agreement) and why are they useful tools for employers?

What is a PSA (PAYE Settlement Agreement) and why are they useful tools for employers?
Paul Chappell
Written by Paul Chappell
Friday, 01 July 2016 10:26

Employers are increasing warming to the use of PAYE Settlement Agreements to account for small or minor benefits that are provided for employees. The benefits of a PSA can be significant for employers in both in time and monetarily.

Find out what types of benefits are suited to a PSA, how a PSA works and why you should consider one ...

A PSA is an annual voluntary agreement with HMRC allowing employers to settle certain tax liabilities on behalf of their employees. PSA’s are most suited to small benefits in kind, they cannot be used for such benefits as company cars, vans (with the odd exception see below) and medical insurance.

What types of benefits are suited to a PSA?

The main purpose of a PSA is to save employer’s the time and expense of completing forms P11D for small one off benefits in kind. The types of benefits that may be appropriate for a PSA are

  • Gift vouchers and small gifts
  • Personal incidental expenses in excess of the statutory daily limits of £5 in the UK and £10 overseas
  • Presents for an employee in hospital
  • A car or van used by multiple employees where it is not practical to apportion the benefit between the employees
  • Subscriptions to a sports club

Staff social functions not covered by the annual exemptions (£150 per employee)

How does a PSA work?

Employers commence the process by applying to HMRC to include certain benefits in a PSA. HMRC will issue to the employer a formal contract which must be signed and returned to HMRC. This contract formalises the agreement that the employer will settle the tax and NIC liabilities on the employee’s behalf.

HMRC have produced form PSA 1, which provides the instructions for the calculations. The effect of the PSA is that the employer settles the tax liability on a grossed up basis for all affected employees. Employees NIC is not payable, the employer only pays employers Class 1B national insurance.

Are there any specific dates to look out for?

A PSA can be agreed with HMRC any time up to 5 July following the end of the relevant tax year. So for 2015/2016, as long as the agreement is in place by 5 July 2016, the benefits can be settled through the PSA rather than include on form P11D.

The submission of the PSA 1 must be made to HMRC. HMRC will confirm the amount payable, the due date for payment being 19 October.

Why should employers consider a PSA?

  • The employee will not suffer a tax charge on the benefit in kind. This will help maintain staff morale
  • The tax and NIC payable is an allowable deduction and can be set against the employers taxable profits

With the due date for payment being 19 October, although the amount of tax and NIC may be relatively small, this could help with cash flow.

Dataplan can assist with PSA’s or contact HMRC on client’s behalf and arrange for the forms to be completed and submitted by the due dates.

Please contact us for further details.

Paul Chappell

Paul joined Dataplan from HM Revenue and Customs in 2007 and runs our PAYE compliance and investigation services.

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