Using a PAYE settlement agreement (PSA)
Jul 12, 2019
PAYE settlement agreements (PSAs) can be used to help pay some of your employees’ tax. A PSA is an arrangement which enables an employer to settle the income tax and National Insurance liabilities on benefits in kind, and on other expense payments which you may provide to your employees and officeholders.
Why would you use a PSA?
The great thing about setting up a PSA is that it allows you to avoid passing on an unexpected, (and potentially demotivating), tax charge to your employees. In those circumstances where a PSA has been agreed with HMRC, this then removes the need for any reporting on the individual employee’s P11D.
However, note that in order to be included in a PSA the item must meet one of these three criteria:
- it’s minor
- it’s irregular
- it would be impracticable to apply PAYE, or to apportion it between the employees receiving the benefit.
Although reporting will eventually go online, applications for a PSA are currently made in writing to HMRC. The Revenue will then issue a P626 contract, which states that as the employer, you will pay the tax and National Insurance liability on any agreed benefits.
Travel costs in public sector PSAs
Until recently, HMRC allowed taxable travel expenses for Non-Executive Directors (NED) in the public sector to be included in PSAs, if it consisted of normal commuting costs. However on 30 May 2019 The Department of Business (BEIS) wrote to the bodies it oversees, and instructed them that going forwards any payments for commuting made to non-executives and other office holders will now have to be paid through payroll, with tax and National Insurance deducted at source.
It’s worth noting that fees for non-executive director roles in both the public and private sectors are always subject to tax and NI through the payroll. This is because it is income received for the holding of an office, so it cannot be invoiced and paid gross to the NED.
If you have any queries about PSAs or would like advice on setting one up, please contact us and we’ll be happy to help.