Employers use PSAs to pay tax on behalf of their employees in respect of taxable benefits and expenses. PSAs will usually cover taxable staff entertaining and staff gifts. Mistakes are costly, so a PSA must be carefully monitored and requires periodical cold reviews to ensure it remains an effective agreement for the employer.
PSAs are costly, as the effective rate for a 40% taxpayer is almost 90%. For example, the total costs of a £100 voucher given to an employee under a PSA will actually be around £190.
Employers must ensure they:
- Have correctly interpreted the tax legislation;
- Are able to justify any reasonable assumptions they make in their calculations, and
- Apply relevant tax exemptions to minimise the cost.
How do PSAs work?
In broad terms, they work as follows:
- Identify the items the employer wishes to pay the tax on.
The taxable benefits and expenses must be:
a. Minor (such as taxable work-to home taxis);
b. Irregular (such as relocation expenses not covered by HMRC’s exemption); or
c. It must be impractical to be able to identify precisely who received what (for example, staff entertaining).
- Make a request to HMRC and obtain its agreement to the items in the PSA.
The deadline for this agreement is the earlier of:
a. 6 July after the end of the tax year; or
b. The due date for payment of Class 1 NIC where that is due on the item included in the PSA.
- Prepare calculations
The calculation is made up of three elements:
a. Tax on a grossed-up basis depending on the employee’s marginal rate of tax;
b. Class 1B NIC on the tax (current rate 13.8%); and
c. Class 1B NIC on the benefit (current rate 13.8%).
The current effective rates of all tax and NIC for the employer are as follows:
20% taxpayer - 42%
40% taxpayer - 90%
45% taxpayer- 107%
- Submit the calculations to HMRC
The due date is shown in the agreement with HMRC, but is usually negotiable.
- Obtain HMRC’s agreement
- Pay the liability
The due date is 22 October after the end of the tax year (or 19 October if not paying electronically).
Why have a PSA?
Despite the fact that it is costly, most employers have a PSA. There are two key attractions:
- It generates employee goodwill
Taxable benefits or expenses covered by a PSA do not need to be included on a P11D. It therefore helps employers generate goodwill among staff as the employees do not have to pay the tax that is due.
- It saves time
This is especially so in relation to staff entertaining, where it may be difficult to identify attendees and the level of taxable benefit for each.
How do employers reduce their liability?
A careful cold review is key to ensure that only taxable items are included. There are a number of exemptions available that can reduce the amount that is liable to tax. The two most common are:
- Trivial benefits exemption
This is a new exemption from 6 April 2016. No tax or NIC is due if:
a. The cost of the benefit does not exceed £50 per head;
b. The benefit is not provided as part of a salary sacrifice arrangement;
c. The benefit is not in the form of cash or a cash voucher; and
d. It is not reward or recognition for service.
If, for example, an employer gives their employees a £25 store voucher at Christmas, it should be exempt from tax and therefore it need not be included in the PSA calculation.
A company that gives its 100 employees a £50 voucher for their birthday could be overpaying tax by around £5,000 if it is not aware of the trivial benefit exemption.
There are special rules for close companies whereby the total value per year may be capped at £300 for directors.
- Christmas Party or other similar annual function exemption
In very broad terms, the cost of an annual function will be exempt providing:
a. The event is open to all employees generally (or where the employer has more than one location to all employees at that location); and
b. The cost per head does not exceed £150 including VAT
Overstating can cause problems
In our experience, employers often overstate their PSA liability. As a consequence, they pay too much tax and NIC. The two most common problems are:
- Insufficient information to make a decision (such as poor narrative on an expense claim); and
- Lack of awareness of all relevant exemptions.
It is important to identify costs that are not taxable. This can often result in significant tax and NIC reductions. It may also be possible to go back up to four years and claim a tax refund so businesses should act now to ensure they are not overpaying HMRC.
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. 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 publication.