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 employers to make one annual payment that covers tax and National Insurance contributions (NICs) on minor, irregular or impracticable expenses or benefits on behalf of their employees.

① How do you get a PAYE Settlement Agreement?

To obtain a PSA, employers are required to write to HMRC describing the expenses and benefits they wish to include in their PSA.

Once both parties have agreed on what can be included, HMRC will send two copies of a P626 form. The employer is then required to sign and return both copies.

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, companies that wished to implement a PSA had to apply annually before the start of the tax year.

Companies with an enduring PSA in place only need to write to HMRC in the event that the employer wishes to make amendments to the benefits on the PSA.

If the employer wants to cancel the PSA then they need only complete and return the slip at the bottom of the P626.

② What is included in a PAYE Settlement Agreement?

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 that don’t have a fixed value. Examples would be personal care expenses, shared cars or special staff events.

③ 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.

④ When are the PAYE Settlement Agreement deadlines?

PSA application deadline

A PSA1 form has to be submitted no later than 5 July following the end of the tax year in order to apply.

PSA payment deadline

The PSA payment deadline is 22 October, tax and NICs due under a PSA must be paid no later than this date for the 2020/2021 tax year. You may be charged late penalties if payment is late.

⑤ 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 6 April

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

• have 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 6 April and 5 July

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

• have already included in your employee’s tax code

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

⑥ 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.