Reshma Johar looks at the potential advantages of PAYE settlement agreements for employers providing staff with certain benefits and expenses.
A PAYE settlement agreement (PSA) is there to alleviate certain benefits and expenses from having to be declared on either an employee’s form P11D or self-assessment tax return.
Employers will settle the tax and National Insurance contributions on behalf of employees, resulting in the employee receiving a benefit at zero cost.
What’s in – and out
There are three categories for qualifying benefits and expenses:
- Minor: examples include incentive awards, small gifts and vouchers, staff entertainment such as a ticket to an event. Note that most (minor) benefits costing under £50 are not taxable (ITEPA 2003, s 323A); therefore, they do not need to be included within the PSA.
- Irregular: examples include expense of a partner accompanying an employee abroad.
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Impracticable: examples include an annual party or personal care expenses.
HMRC has stated the following cannot be included within a PSA:
- Cash payments of wages.
- Other cash payments such as long service awards.
- Large benefits provided regularly to individual employees such as company cars, car fuel or beneficial loans.
- Round sum allowances.
- Shares.
- Payments into funded unapproved retirement benefit schemes.
- Items from which tax has already been deducted under PAYE.
- Items which are already reflected in the employee’s tax code for that year.
- Profits arising from various mileage payment schemes and other regular items arising in employee car ownership schemes.
The mechanics
The employer is liable to income tax and Class 1B NICs on the grossed-up benefit or expense. The tax and NICs settled by the employer is treated as a further benefit.
See HMRC’s PAYE Settlement Agreements manual for an example.
Covid-19
Usually, if an extra benefit or expense needs to be included within a PSA, the employer will need to submit a form P626 to HMRC. However, if Covid-19 related, a form P626 is not required. Instead, HMRC will add an appendix to the existing ‘enduring agreement’.
Examples of Covid-19 related expenses or benefits include taxi expenses or providing office furniture for an employee.
Once you’re in, you’re in!
- Write to HMRC detailing the benefit or expense to be covered within a PSA.
- Wait for HMRC to issue a P626 form.
- Employer should sign the P626 form and return back to HMRC.
Since 6 April 2018, companies no longer need to renew their requirement for a PSA annually. Instead, it is now an ‘enduring agreement’ which remains in place as long as is needed.
Interaction with P11D forms
If a benefit or expense has already been included within an employee’s PAYE tax code, or if included (or should have been included) under real time information, these items cannot be included within the PSA. Instead, it should be reported within a P11D form.
Benefits and expenses can only be included on a PSA once HMRC has issued an agreement, and subject to the above requirements.
Employers will still need to adhere to operating PAYE on general earnings as well as reporting expenses and benefits in kind on P11D forms.
Deadlines
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Applying: 5 July following the end of tax year it applies to.
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Submitting PSA: 31 July following the end of tax year.
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Paying tax: 22 October following the end of tax year (19 October if by post).
Warning ‘devolved income taxes’
Separate rates of income tax were effective from 6 April 2016 in Scotland, and from 6 April 2019 in Wales. As a result, employers may be required to prepare three calculations, as it will depend on where their employees are subject to income tax.
Practical tip
Employers should frequently review PAYE processes to assure correct reporting, and to satisfy the balance between employee benefits versus cost to the employer.
