PAYE Settlement Agreements (PSAs) offer an alternative approach to handling employees’ taxable benefits and expenses, differing from the traditional P11D form submission. These agreements are particularly advantageous for employers looking to manage the tax burden of their employees’ benefits more effectively.
What is a PAYE Settlement Agreement?
A PSA is a formal arrangement where an employer agrees to settle any tax due on certain employee benefits. This agreement simplifies the process into one annual submission and payment to HMRC, rather than individual tax payments on each benefit by employees. Once set up, a PSA remains in effect unless altered or cancelled by the employer or HMRC.
The Financial Implications of a PSA
The unique aspect of a PSA is that the tax payment made on behalf of an employee is considered a benefit. Therefore, the tax is calculated on the grossed-up value of the benefit, which can result in a higher tax bill compared to if the employees were paying the tax individually. Under a PSA, Class 1B National Insurance contributions are applicable, replacing any Class 1 or Class 1A contributions linked to the benefits and expenses included in the agreement.
Suitable Benefits for a PSA
PSAs are ideal for covering minor but taxable benefits such as telephone bills, small gifts, staff entertainment, and non-business travel expenses that exceed daily limits. They are also useful for irregular benefits like costs exceeding the tax-free limit for relocation expenses, attendance at overseas conferences, or spouse expenses on business trips. PSAs are additionally beneficial for benefits with no fixed value, like shared taxis, and for situations where reclassified employees previously treated as self-employed require coverage.
Advantages of Using a PSA
One key advantage of a PSA is the potential reduction in penalties and interest, allowing employers to review and account for all taxable items at the year’s end.
Determining the Tax Rate for PSA
The benefits under a PSA are taxed according to each employee’s marginal tax rate. It’s important to consider varying tax rates across the UK, as devolved governments can set different income tax rates.
Practical Considerations for PSAs
HMRC typically requests annual PSA calculations by a specified date, usually around 31 July or 31 August. While there’s no statutory deadline for submission, payment for the PSA must be made by 19 October (or 22 October if paying electronically) following the end of the relevant tax year.
PSAs provide a streamlined approach for employers to handle taxable employee benefits, offering ease of administration and potential financial benefits. Employers should consider the suitability of a PSA for their business and consult with a tax professional to navigate the setup and maintenance of these agreements.
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