PAYE Settlement Agreement Letter Template

A PAYE settlement agreement is a one-off annual payment to cover the tax and National Insurance due on minor, irregular or impracticable expenses and benefits for your UK staff. By obtaining a PSA for these items, it means that you will not have to put them through payroll in order to calculate tax and National Insurance due. Neither will you need to include them in end-of-tax-year P11D forms. And rather than paying Class 1A NI at the end of the tax year, you’ll pay Class 1B NI as part of the PSA instead.

In short, it is the employer who is responsible for submitting a PSA to HMRC. The process begins with the employer, by asking HMRC to include certain benefits within it. HMRC will then issue a formal contract to the employer, which should be signed and returned to HMRC. This contract states that it is then the employer’s responsibility to pay the tax and NI on behalf of its employees.

The main benefit of a PAYE settlement agreement lies in the fact that it is a one-off settlement covering all UK tax and NI contributions on expenses or benefits. In other words, there is no need to payroll benefits every month, or include them in P11D forms, freeing up time and reducing hassle for the payroll team.

Minor expenses cover small, low cost items such as gifts and vouchers, telephone bills and incentive awards. Irregular benefits and expenses are things that are not paid at regular intervals over the course of a UK tax year. It refers to things that employees do not have a contractual right to, for example relocation costs, overseas conference allowances, use of a company holiday residence and so on. Impracticable refers to things that are hard to attribute a value to, such as shared company cars or personal care expenses.