What is a PAYE Settlement Agreement and What Does it Do?

A PAYE Settlement Agreement, otherwise referred to as a PSA, is a process that allows you, as an employer, to make one annual payment to cover tax and National Insurance contributions (NICs) on minor, irregular or impracticable expenses or benefits on behalf of your employees.

In this post, we’ll go over what a PAYE settlement agreement is and what you should include in it regarding expenses and benefits. We’ll also provide a PSA letter template you can use if you’re submitting your PSA by post.

How do you get a PAYE Settlement Agreement?

Employers can now apply for a PSA online on the gov.uk website. HMRC’s new online application system lets you describe the expenses and benefits you wish to include on your PSA. You can also post your form* to HMRC, though a less commonly used method as tax goes more and more digital. 

Once you’ve submitted your PSA form online, HMRC will check what’s included and will reach out if there are any issues. If your request is authorised, you’ll get a confirmation email or letter.

*If you’ve posted your form, then HMRC will send you two copies of the P626 form, which you’ll be required to sign and return. HMRC will then authorise the request and return a form, which will then act as the PSA.

For the 2019/20 tax year, HMRC reformatted the PSA process, ensuring that PSAs were automatically renewed year on year in what is known as an “enduring agreement”. Up until then, if you wanted to implement a PSA, you would need to apply annually before the beginning of the tax year.

If you have an enduring PSA in place, then you only need to write to HMRC if you wish to amend any benefits on the PSA.

You can also cancel your PSA anytime online. HMRC will send you an email or letter to confirm. If you’ve cancelled by post, you might get a P626 with the cancellation date, though you can expect a confirmation letter from HMRC in addition to this.

What is included in a PAYE Settlement Agreement?

There are three main types of PSA expenses or benefits you need to include on a PAYE settlement agreement: those that are minor, irregular or impractical. So, what do each of these mean? Let’s look at a few examples:

Minor benefits and expenses include things like incentive awards. These may be handed out to employees as a reward for their long service with an organisation.

Other items such as small gifts and vouchers also fall under this category, as well as telephone bills or staff entertainment—e.g. annual parties.

Irregular benefits and expenses relate to things that are not paid regularly throughout the course of a tax year. They are typically things that employees do not necessarily have a contractual right to—e.g. relocation expenses over £8,000, attendance at overseas events or the use of a company holiday venue.

Impracticable benefits and expenses refer to items or events with no fixed value.  Examples would be personal care expenses, shared cars or special staff events.

What’s not included in a PAYE Settlement Agreement?

Companies cannot include cash payments such as wages and beneficial loans or high-value benefits such as company cars or company accommodation.

When are the PAYE Settlement Agreement deadlines?

There are two separate PSA deadlines - one for submitting your application and the other for making your payment. 

PSA application deadline

The PSA submission deadline is the 5th of July. Whether submitted online or by post, A PSA1 form must be submitted no later than this date following the end of the tax year in order to apply.

PSA payment deadline

The PSA payment deadline is the 22nd of October (or the 19th of October if you’re making your payment by cheque). Tax and NICs due under a PSA must be paid no later than this date for the tax year in question. You may be charged a late penalty fee if payment is late.

What to pay when the PAYE Settlement Agreement is approved?

If HMRC approves your PSA before the start of a tax year, you can include any expenses and benefits contained in the agreement.

If they approve it after the start of the tax year, you might need to report some items separately.

If your PSA is approved before the 6th of April

You must use form P11D to report expenses and benefits provided before the agreement date that you’ve:

• already included in your employee’s tax code

•  included (or should have included) in your employee’s PAYE tax and National Insurance deductions

If your PSA is approved between the 6th of April and the 5th of July

You must use form P11D to report expenses and benefits provided during the tax year that you’ve:

• already included in your employee’s tax code

• included (or should have included) in your employee’s PAYE tax and National Insurance deductions

How can PayFit help?

If you are unsure about PSAs or just want to find out more about the benefits associated with using them, one of our payroll specialists is always available to offer a helping hand.

 Book a call today to find out how PayFit can help optimise your payroll processes.