What is a PAYE Settlement Agreement (PSA)?
In one of our blogs earlier this month we talked about when you need to complete a form P11d in respect of benefits and expenses. Due to the pandemic and lock down, numerous businesses have had to spend extra money on their employees to facilitate the change of work environment. Our P11d Blog discussed what benefits you need to report so please have a read if you are not familiar.
Generally speaking, any expenses incurred exclusively to enable your employees to work and perform their duties does not need reporting to HM Revenue & Customs (HMRC). This has always been the rule and is no different during Covid. Provisions of PPE and testing kits during the last year is also exempt.
However certain irregular benefits that you may provide to your employees may have tax implications and can qualify for a PSA.
The PSA mechanism allows you to make one annual payment to HMRC which will cover the tax and all national insurance due on the expense or benefit. The item concerned does not therefore need to be put through the payroll or reported on the P11d form. It also means that your employee does not need to bear any of the tax burden.
What expenses can be included under a PSA
There are three categories of items that can be included under a PSA. The expenses or benefits must be minor, irregular, or impracticable.
These are small items but not including trivial-benefits because these do not require reporting. Items such as awards including those for long service, small gift and voucher, tickets to events, excess expenses for business travel etc.
These are expenses that are more one-off’s or not regular and the employees do not expect any of these because it is not in their contract. Examples can include expense of staff’s spouse travelling during an overseas work trip, use of company accommodation, relocation expenses exceeding the £8,000 allowance.
These are items where placing a value is difficult because it would involve dividing between employees. One example is events organised by the employer (but costs exceed the entertainment allowance of £150).
Cash payments such as bonuses and round sum allowances cannot be included in a PSA and should therefore be put through the payroll.
How do I apply for a PSA?
Write to HMRC as soon as you have made the payments for any expenses that you want covered in the PSA. See address below and quote your PAYE reference.
Once HMRC have agreed that the item can be covered they will send you (by post) 2 copies of the agreement. You will need to sign and send back both agreements to HMRC.
HMRC will then authorise your request and send you back a form, this is your PSA.
Use a form PSA1 to help you calculate the amount of tax and national insurance you will need to pay. If you are happy you can submit the calculation via a spreadsheet which is often what we do for our clients.
Send off the completed form to HMRC after the end of the tax year and they will get back to you before the payment date of 19th October with a confirmation of your calculation together with a payslip setting out your unique tax reference.
Your agreement continues for future years, but you still need to renew it each year. Once your PSA is agreed it does remain in place until you cancel it in writing so HMRC will be expecting communication from you if say for one year no expenses have been paid.
If you would like your accountant to do the above process, you would normally need to give them written authority.
The address to use is:
Business Tax and Customs - PSA Team
Benton Park View
What are the deadlines for a PSA?
The deadline for applying for a PSA is 5th July following the end of tax year. So, for tax year 2020/2021 the deadline is 5th July 2021.
The deadline for paying the tax and national insurance is 22nd October 2021 (in the above example) or 19th October if not paying online.
You may be fined or charged interest if payment is not made on time.
PSA works very well when you want to reward team members for the work, they have put into your business but do not want them to suffer the tax consequences. It provides a mechanism whereby the reporting can be streamlined and is quite simple to do once you know how.
If you are rewarding employees or making some payments as covered in the above examples, it is important that you do not ignore this area because whenever there is a payroll audit by HMRC they will focus on what expenses and benefits you provide to your employees.
We have expertise in this area and can most certainly guide you through so you should contact your manager at Myers Clark or Priya at firstname.lastname@example.org if you are unsure. The confusion very often arises whether an expense is subject to tax and if so, should it be reported via the payroll, included on the P11d or via a PSA. Now is the time before July to seek clarification if you have any doubts.