PAYE Settlement Agreements – what they are and why you probably need one

As we enter the final quarter of 24/25 tax year, many companies will be starting to plan for their year end compliance cycle and the numerous reports that need to be made to HMRC. For companies that do not voluntarily payroll employee benefits (most companies still do not do this), the requirement to report employee benefits on form P11D and calculating Class 1A National Insurance liability on form P11D(b) is one that few look forward to.

Running alongside the P11D (and payrolled benefits) reporting, some companies must also report to HMRC under a PAYE Settlement Agreement (PSA).

If your company already has a PSA in place then you will hopefully already know what one is and what HMRC require as part of the agreement. If, however, your company doesn’t have one agreed then this article is for you and covers the basics of what a PSA is, what they are used for, what can be included on one and why we think they are a good thing for a company to have.

Before we dive into the benefits of PSAs, it’s worth first remembering what should be reported on form P11D for your employees. In the absence of payroll reporting of employee benefits, form P11D is used to report all benefits and taxable expense payments provided to an employee during the tax year. The point to remember is the “all benefits” remit of the P11D.

What counts as a benefit?

Benefits come in many different forms. Private medical insurance, company cars, season ticket loans, pension contributions and life assurance are examples of benefits commonly provided to employees.  Less commonly seen are benefits such as accommodation, reimbursement of home broadband costs, non-qualified relocation expenses and assets transferred to employees.

Not all of the above are taxable but where provided, there is little question that the employee is benefitting in some way from what their employer is providing to them. When the benefit is a taxable one therefore it is easy for an employee to understand why they must pay tax on it.

However, there are also likely to be perks you provide to your employees which neither you nor they consider to be an ‘employee benefit’ but the tax rules do. Staff entertainment, certain employee gifts, food provided at working lunches, team building activities, and even the subsidy you pay for the weekly 5-a-side pitch are all examples of (potentially) taxable benefits that are often overlooked.  Employees don’t consider these to be of any “benefit” to them.  They certainly don’t expect to pay tax on what is provided and this is where a PSA comes in.

What is a PSA?

A PSA is an agreement between a company and HMRC which enables the company to report certain agreed employee expenses and benefits directly to HMRC via a ‘PSA submission’ rather than using the employee form P11D. In order to do this, the company agrees to pay the Income Tax and National Insurance contributions on the agreed expenses and benefits on behalf of its employees.

So a PSA allows certain benefits not to be reported via a form P11D, but through a different agreement with HMRC. However, it comes at a cost to the company. The cost is not just the payment of the income tax that the employee would have paid, it’s much higher as the employer paying tax on behalf of an employee, is in itself a taxable benefit. To account for this “tax on tax” situation, benefits reported on a PSA are grossed up at the employee’s marginal rate of tax which significantly increases the amount of tax payable on a benefit reported on a PSA.  Add to that the higher amount of employer NIC payable (as NIC is payable on the grossed up benefit), and the cost of using a PSA quickly adds up.

What can be included in a PSA?

Not all expenses and benefits can be reported on a PSA. It is only intended for minor, irregular or impracticable expenses or benefits that are provided to employees.

Examples of minor benefits and expenses include: taxable incentive awards (such as a long-service gift or ‘employee of the month’ vouchers), telephone bills, small gifts and vouchers not covered by the trivial benefit exemption, or taxable staff entertainment (see below). Irregular expenses and benefits cover things like relocation expenses over £8,000, the expense of a spouse accompanying an employee on an overseas business trip, or the occasional use of a company-owned flat.

The final type of expense or benefit that can be included is one where it’s impractical for the employer to determine the cost for a specific employee. This includes taxable staff entertainment (see more below), use of a shared car, or the expense of some in-office beauty treatments (that not all employees use).

This is not an exhaustive list, and you can ask to include anything which qualifies as either a minor, irregular or impractical benefit or expense.

Staff entertainment

Staff entertainment is one of the main items companies report on a PSA but what should be reported as taxable staff entertainment is often more wide reaching than many realise.

When asked what staff entertainment expenses a company incurs each year, most people immediately identify a big, all-employee event (usually a Christmas or summer party) as the only entertainment they provide for staff. Such parties are of course a form of staff entertainment and only taxable if the annual staff event exemption doesn’t apply.

What many overlook is that, throughout the year, there is often a lot more “ad hoc” staff entertainment provided and paid for via the employee expense system. The cost of team building events, team lunches, coffees when a manager conducts an employee’s appraisal off site, a directors’ dinner, even a round of drinks a manager buys for the team in the local pub on a warm Friday in July are all considered a form of staff entertainment.

Some companies assume that such expenses are a non-taxable business expense. This might be because the staff were discussing work, or because the cost benefitted the company by the team working together better. Unfortunately, this is an incorrect assumption and there are no exemptions for expenses such as these.

The alternative to a PSA

Without a PSA, the benefit of such ad hoc staff entertainment should be reported on an employee’s annual P11D. To do this correctly, a company would need to know exactly what benefit each employee received. The amount of work required to do this even for a company of few employees, is almost unimaginable. “So did Neil from finance have two pints and a burger but no chips but Gemma only had a salad with a dessert and a soft drink? – the mind boggles.

Even if a company could work out who had two drinks and who only had one when looking at the receipt submitted at the time the expense was claimed, can you imagine the reaction of employees when they receive a tax bill for the “Friday Night Drinks” that were intended to be a thank you gesture by the manager/company? It’s this reaction that most companies fear and are happy to incur a cost to avoid it happening.

Should you consider a PSA?

Companies that do not report benefits such as Neil’s two pints and a burger on his P11D are technically not compliant with their employment tax obligations and could face penalties should HMRC investigate and discover this.

With compliance almost impossible and non-compliance a risk for the business, companies may feel stuck between a rock and a hard place. PSAs do offer a means of avoiding this undesirable situation.

Reporting those benefits/expenses which can be included via a PSA requires much less work and allows the company to fulfil its employment tax obligations. Despite the additional cost, it is likely to be less than the tangible and intangible costs it risks from continuing to do things in a non-compliant way, or by charging its employees to tax on such expenditure.

HMRC also see PSAs as a good tool which allows a company to fulfil their obligations. Which of course should be expected as companies that sign up for a PSA are far more likely to report benefits like ad-hoc staff entertainment, than companies without one, so HMRC are receiving monies they otherwise would not have done.

So, are PSAs worth signing up for if your company does not already have one? In my opinion and experience, absolutely.  Whilst signing up for a PSA will mean some extra work and cost, the benefits far outweigh that cost.

If you do not currently have a PSA agreed with HMRC, you have until 6 July 2025 to request one. This will apply retrospectively for the 2024/25 tax year.

If you would like to discuss what assistance we are able to provide in relation to the reporting of employee benefits or any other employment tax matter, please do get in touch.