PAYE Settlement Agreements: Get the details right
Gemma Mullis from the CIPP looks at the process of applying and reporting of a PAYE settlement agreement and why one would be required.
With reports of employers rewarding their employees who have gone above and beyond in their performance during this difficult period, it would be prudent to familiarise yourself with the income tax and National Insurance (NIC) liabilities involved in issuing gifts to employees.
Any gift or benefit given to an employee that relates to their performance attracts an income tax and NIC liability, which in some cases an employer may choose not to pass onto an employee. In this event, an employer will need to cover this liability for, tax and NICs via a PAYE settlement agreement (PSA).
What is a PSA?
A PSA allows as an employer to make one annual payment to cover all tax and NIC liability on items that are minor, irregular, or impracticable.
Once a PSA has been agreed, employers will not be required to process the values via PAYE, include them on employee P11Ds at year end and pay Class 1A NICs on them. Although there is no Class 1A NIC liability, employers will be liable to pay Class 1B NICs when payment of the PSA is processed.
What can be included?
To be included within a PSA and item must be:
- Minor: Such as non-business expenses whilst travelling overnight on a business trip that exceeds the daily limit.
- Irregular: Such as relocation expenses over £8,000
- Impracticable: Are items whose cost cannot be easily valued per employee, such as staff entertainment expenses not already exempt from tax or NI liability
How to apply
To apply for a PSA an employer must provide details of items to be included within an application to HMRC, including:
- Details of the expenses and benefits that an employer wishes to cover on their PSA must be sent in writing to HMRC Business Tax and Customs
- Two draft copies of form P626 will be issued by HMRC once they have agreed on what can be included. Both copies will need to be signed and resent to HMRC. The request will then be authorised, and a copy will be issued back to the employer as proof that a PSA is in place
- Anything that cannot be included on the PSA will need to be reported separately on form P11D
- When calculating monies due, employers should use a PSA1 form. It is important to note that, if this is not completed, HMRC will calculate the amount which could see an employer being charged more.
- Once completed, the form should be sent to HMRC as soon as possible following the end of the tax year it relates to
- HMRC will then write to confirm the amounts due for Tax and NICs before 19 October (22 if paying electronically) following the tax year to which the PSA relates
Once a PSA has been applied for and agreed, the PSA will remain in place for each subsequent tax year until an employer requests to either cancel or make an amendment to it. Any amendments to a PSA will require the employer to submit a request and a P626 will be reissued.
How to calculate the PSA payment
The amounts calculated as payable via a PSA are based on the value of the expense/benefit given and the tax bracket the recipients of the benefit are in. Those values are then calculated at the appropriate rate and ‘grossed up’. Once this is calculated, the employer is then obliged to pay Class1B NICs on the total value attracting Class 1A NICs plus the grossed-up taxable pay at a rate of 13.8% of the total value. A working example of this calculation can be found here.
HMRC provides a calculator to help employers calculate the income tax and Class1B NIC liability.
What are the deadlines?
Payments due for a PSA must be paid by the 22 October after the tax year in which is applies (19 October if by post). Fines and interest may be payable if made after this date. Due to the current pandemic, HMRC advises that Covid-19 can be considered as a reasonable excuse as to why payments are late. Each case will be looked at individually, and providing the payment is made, fines and interest may be withdrawn. More details on reasonable excuses for late payment can be found here.
If HMRC approves a PSA before the start of a tax year, employers can include any expenses and benefits contained in the agreement.
If approved after the start of the tax year, employers may need to report some items separately. If a PSA is approved before 6 April, employers must report expenses/benefits that have been provided prior to the agreement date, on a P11D.
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Gemma joined the CIPP in October 2017, originally part of the Advisory Team, and has recently moved across into her new role within policy, as a policy and research officer. Gemma has worked within a payroll, human resources and finance environment for the last 19 years.