PAYE Settlement Agreements (PSAs) enable employers to pay employment income tax and National Insurance Contributions (NIC) on behalf of their employees for many taxable benefits and expenses, removing the requirement to report these items through payroll or on the employees’ forms P11D.
Why have a PSA?
Many employers have a PSA because:
- it generates employee goodwill, as the employer pays the income tax and NIC on items otherwise taxable on the employee; and
- it saves time., In the absence of a PSA, for example, the collective cost of a staff entertaining event would have to be accurately apportioned to each attending employee.
Notwithstanding these clear benefits, PSAs are costly, as the employer is required to ‘gross up’ the PSA item for income tax and NIC. The effective combined income tax and NIC rates for the employer are as follows:
- 20% taxpayer – 42%
- 40% taxpayer – 90%
- 45% taxpayer – 107%
For example, the total cost of providing a £100 gift under a PSA to a 40% taxpayer is around £190.
Obtaining a PSA
A PSA can be agreed before 6 July following the end of the tax year to which it first applies.
PSAs remain in place for future years until they are cancelled. Employers will therefore need to agree with HMRC any benefits or expenses not included in a prior year PSA.
Items covered by a PSA must be:
- Minor, such as taxable work-to-home taxis;
- Irregular, such as gifts or relocation expenses not covered by HMRC’s exemption; or
- it must be impractical to be able to identify precisely who received what, such as for staff entertaining.
Annual reporting requirement
The deadline for submitting PSA income tax and NIC calculations to HMRC is shown in the agreement, and is usually 31 July following the tax year-end. The due date for settling the PSA liability is 22 October after the tax year-end, or 19 October if the employer is not paying electronically.
Performing the calculations may be a complex and lengthy process because:
- the benefits and expense information may be voluminous and difficult to attribute to employees; and
- the calculations require the correct interpretation of income tax and NIC legislation, particularly in relation to exemptions that may apply for some benefits or expenses.
How can employers reduce their PSA liability?
Employers can minimise their PSA liability by applying available income tax and NIC exemptions. Two common exemptions are:
1. Trivial benefits exemption. No income tax or NIC is due if:
- the cost of the benefit does not exceed £50 a head including VAT;
- the benefit is not provided as part of a salary sacrifice arrangement;
- the benefit is not in the form of cash or a cash voucher; and
- it is not reward or recognition for service.
2. Christmas party or other similar annual function exemption. In simplified terms, the cost of an annual function may be exempt if:
- the event is open to all employees or, where the employer has more than one location, to all employees at that location; and
- the cost does not exceed £150 a head including VAT.
Only one function of £150 a head is available for each employer annually.
How Smith & Williamson can help
We can assist employers by:
- applying for an appropriate PSA on the employer’s behalf;
- calculating the annual PSA liability ahead of the return submission deadline. In our experience, employers often overstate their PSA liability and consequently pay more income tax and NIC than is necessary. We can minimise the liability by applying the correct income tax and NIC exemptions and making reasonable assumptions where appropriate;
- checking an employer’s calculations and assumptions, even if the PSA has been prepared ‘in-house’; and
- helping employers to design, build, and implement the appropriate procedures for operating a PSA.
If you would like further information on PSAs, please contact John Manis on 020 7131 8984, Alfie Heath on 020 7131 8874 or Sarah Richardson on 020 7131 8008.
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.