PAYE Settlement Agreement (‘PSA’)
It’s the time of year when businesses consider what expenditure has been spent last year on expenses and benefits provided to their employees. Certain expenditure may have been incurred to boost team morale in these exceptional times such as team building events, team meals, performance awards, non cash thank you payments etc. These would be considered a taxable benefit on the employees and to ensure that the employees do not have to incur the tax and National Insurance Contributions (‘NIC’) costs, the employer can arrange a PSA with HMRC.
What is a PSA?
A PSA is an arrangement under which the employer enters into an agreement to bear PAYE tax and Class 1B Employers NIC on speciﬁc small, non-cash, items that HMRC deem to be taxable, but you do not want to include them on P11D as a benefit in kind and give the employee a liability to tax. The PSA tax liability is calculated on a grossed-up basis and Employers Class 1B NIC is also due on the grossed-up amount.
The beneﬁts of having a PSA
There are two advantages in choosing to enter into a PSA. Firstly, the employees do not suffer a tax deduction in respect of something that was either intended as a reward or relates to something that they do not recognise as a beneﬁt. Secondly, entering into a PSA demonstrates to HMRC that the employer has reviewed its processes and recognises that a PSA is appropriate. It is an indication to HMRC of good governance and controls, so will reduce your risk rating with HMRC.
With effect from 2018/19 tax year, the process for agreeing PSAs with HMRC has changed. Instead of having to enter into a new agreement with HMRC every year, HMRC will now enter into an ‘enduring’ agreement. Enduring agreements will last until the PSA either needs to be amended, i.e. you want to add an item to it, or the PSA is to be cancelled altogether. There will be no need to enter into a new agreement every year.
The deadline for applying for a PSA is 5 July following the first tax year it applies to. So, if you don’t already have a PSA in place, you must apply by 5 July 2021 for benefits and expenses provided in the 2020/21 tax year. Employers are then required to pay any tax and National Insurance owed by 22 October after the tax year the PSA applies to (19 October if paid by post).
If you miss this deadline, interest and penalties may be charged.
Adding COVID-19 related costs to your PSA
HMRC have recently confirmed that, for the 2020/21 tax year only, any additional items relating to Coronavirus expenses will not require an amendment to the current P626 enduring agreement. HMRC request that employers contact them to include the items in an appendix which will be attached to the existing agreement for the 2020/21 tax year only.
Examples of items that you may wish to include on your PSA as coronavirus expenses are:
- Taxi fares for employees’ home to work travel due to requirements of working in the office;
- Similarly, payment for car parking expenses not at or near the employee’s permanent workplace due to having to work in the office.
- Computer equipment and office furniture provided to employees to allow for them to work from home which has mixed home/work use.
HMRC will add an appendix to the existing enduring agreement.
Here to help
Following a surge in people working from home, there have been many queries around the income tax and NIC treatment in relation to costs incurred as a direct result of COVID-19.
If you would like to know more about PSAs, and how Smith Cooper can help you to manage the process to minimise potential risks and queries from HMRC, please contact us: