PAYE Settlement Agreements: Your Quick-And-Dirty Guide

Wondering which benefits and expenses you can include in a PAYE Settlement Agreement? Or how and when to submit?

In this guide, we'll cover everything you need to know to understand and leverage the advantages of PAYE Settlement Agreements.

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What is a PAYE Settlement Agreement?

A Pay As You Earn Settlement Agreement (PSA) allows employers in the UK to declare their tax and National Insurance contributions (NICs) on some of the expenses and benefits they give their employees.

These are usually the items that are not easily covered through the standard payroll process - they might be minor, irregular, or just impracticable-to-report.

If you're using a PSA, you're essentially entering an agreement with HMRC that says you'll pay tax and NICs on behalf of your employees for certain benefits.

This means you don't have to report these individually for each employee via P11Ds since they'll be summarised under the PSA.

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Benefits of a PSA

For you, the employer

Cut down on admin work: You can simplify your admin processes by consolidating the reporting and payment of tax and NICs for eligible benefits.

Mitigate tax compliance risk: Including certain benefits in a PSA will reduce the risk of non-compliance with tax regulations. Using a PSA is a more structured approach that minimises the chances of errors.

Save time: Processing benefits through a PSA tends to be more time-efficient than individually processing and reporting each minor benefit for every employee.

Get more flexibility: You'll be able to choose which benefits to include in the PAYE Settlement Agreement and customise this based on your specific circumstances and the types of benefits you provide.

For your employees

No additional tax liability: Benefits included in a PAYE Settlement Agreement don't result in any additional tax liability for your employees since you'll be taking on the responsibility for paying the tax and NICs on their behalf.

More straightforward tax: Your employees won't be required to individually report or pay tax on items covered by a PSA.

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Eligibility for a PAYE settlement agreement: which benefits and expenses does it cover?

Benefits and expenses included in the PSA must be minor and irregular.

This just means any benefits/expenses that are impractical to pay tax and NICs on through your regular payroll for each individual employee.

You'll also have to ensure that they don't result in any additional tax liability for your employees.

Types of benefits covered under PAYE Settlement Agreements

Below are some of these benefits that are commonly reported via PSAs.

However, they could also be reportable using either P11Ds or payrolling - this will largely depend on how frequently you need to report these benefits.

Irregular benefits

Benefits that are provided irregularly, such as one-off gifts or bonuses including gifts for special occasions or performance-related bonuses.

Personal incidental expenses

Small personal expenses that are impractical to report individually, like an occasional meal or refreshment.

Entertainment expenses

Costs associated with entertaining employees, like staff parties or events, that are difficult to attribute to specific individuals.

Round sum allowances

Fixed allowances paid to employees for specific purposes, where the exact amounts spent are impractical to determine for each individual.

Non-cash vouchers and tokens

Non-cash vouchers and tokens that are given to employees as gifts or rewards and are not readily convertible into cash.

Personal bills

Payment of personal bills on behalf of employees, where it is impractical to identify the individual amounts for each employee.

Are there any exclusions from a PSA?

Yes - not all benefits and expenses can be included in a PAYE Settlement Agreement.

Cash payments, cash equivalents, and benefits subject to Class 1A NICs are generally excluded.

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What about trivial benefits?

Trivial benefits provided to your employees are generally exempt from tax and National Insurance Contributions.

This means they do not need to be reported on a PSA.

Generally, trivial benefits don't actually need to be reported anywhere.

Here’s HMRC’s criteria for trivial benefits:

• The cost of providing the benefit does not exceed £50.
• The benefit is not in cash or a cash voucher.
• The employee is not entitled to the benefit as part of any contractual obligation (including under salary sacrifice arrangements).
• The benefit is not provided in recognition of particular services performed by the employee as part of their employment duties.

If a benefit meets these criteria, you don’t need to include it in a PSA or report it to HMRC.

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How to set up a PAYE settlement agreement

Identify eligible benefits

First off, you need to make note of any benefits and expenses that meet the criteria for inclusion in a PAYE Settlement Agreement (you can find our list above☝️).

Broadly speaking, these will be the benefits that are minor, irregular, or impractical to process through your regular payroll for individual employees.

Apply for a PSA online

Applying for a PSA is fairly straightforward...

You can apply via HMRC's website (or by post). Just be sure to have your employer PAYE reference to hand.

You'll be asked which benefits and expenses you're looking to include. HMRC will check your list and contact you if there are any issues.

If successful you'll be sent two P626 forms to sign. Once you've signed them you'll get a copy back which you should keep safe - this is the proof of your PSA.

You'll then be sent your PSA form to complete.

Complete your PAYE Settlement Agreement calculations

Once you receive your PSA form,  you'll need to calculate the tax and NICs due on the benefits and expenses included in it.

To work out how much tax and NICs you need to pay, start with the following information:

• The value of benefits and expenses for each PSA category.
• The number of employees who received each of these benefits.
• The number of employees across each income tax band.
• The value of the benefits you've given to employees in each of the different income tax bands.

If you need extra help with this, HMRC have laid out more detailed guidelines here.

Any benefits or expenses that can't be reported in your PSA will need to be declared separately using form P11D (you do not need to send a P11D if you’re paying employees’ expenses and benefits through your payroll).

Make payment to HMRC

You'll need to make a single, annual payment to HMRC to cover the tax and NICs on the benefits and expenses included in your PAYE Settlement Agreement.

This payment is usually made after the end of the tax year but before 22nd October.

Reporting using a P11D(b)

Details of your PSA need to be reported via a P11D(b) form. This will report on the total Class 1A NICs liability for the tax year.

This needs to be submitted by July 19th.

Make sure you keep record of your PSA

Make a note of any benefits and expenses included in your PAYE Settlement Agreement, as well as any calculations and payments made to HMRC.

It's recommended that you keep these records for at least three years.

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🗓️ PAYE Settlement Agreement deadline

Applying for a PSA

If you're applying for a PAYE Settlement Agreement - the submission deadline is 5th July (following the tax year you're reporting on).

So if you were to submit a PSA for the 2023 to 2024 tax year, you’d have until 5th July 2024 to apply.

Paying your PSA

When it comes to paying the tax and National Insurance owed under a PSA, you'll have until 22nd October (or the 19th October if paying by post).

Again, the payment deadline will be the October following the tax year your PSA reports on.

🚨 Note: When you apply for a PSA will affect what you can include in it

If you apply before the start of a tax year, any expenses and benefits covered by the agreement can be included.

But if you wait until the tax year is already underway, you might need to report some things separately.

If you apply before the tax year starts (6th April): Use a P11D to report expenses and benefits provided to your employees before the PSA agreement date.

If you apply once the tax year has started (6th April - 5th July): Use a P11D to report expenses and benefits provided to employees during the tax year.

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PAYE Settlement Agreement FAQs

How does a PAYE Settlement Agreement work?

A PAYE Settlement Agreement simplifies tax for minor, irregular or impractical expenses. Instead of reporting them separately for each employee via a P11D, these are summarised in a single, annual submission.

When reporting benefits and expenses using a PSA, you enter a formal arrangement with HMRC whereby you agree to pay tax and NICs on your employees' behalf (for certain benefits covered under the scheme).

How to pay your PAYE Settlement Agreement

Once you've received your PAYE Settlement Agreement form from HMRC (you can apply via their website), you need to calculate how much tax and NICs you need to pay for each benefit expense.

There are a few ways you can pay your PSA:

• Online via HMRC's website
• Direct Debit
• Payment through your online bank account
• Online or telephone bank transfer
• Debit or corporate credit card online
• At your bank/building society
• Cheque through the post

The deadline for payment is 22nd October.

What goes in a PAYE Settlement Agreement?

Here are some of the benefits/expenses that you might want to cover using a PSA:

• Irregular bonuses
• Costs associated with staff events, parties, or other entertainment
• Trivial benefits
• Low-value perks and gifts (with a cost of £50 or less)
• Round sum allowances
• Fixed allowances provided to employees
• Personal incidental expenses
• Small personal expensesNon-cash vouchers and tokensNon-cash vouchers or tokens
• Welfare facilities
• Travelling expenses
• Payments on behalf of employees (personal bills or expenses)
• Additional voluntary contributions (AVC)