Pay As You Earn Settlement Agreements (PSAs) are arrangements under which an employer can settle the income tax and National Insurance liabilities on benefits in kind and expenses payments provided to employees and officeholders. They were first introduced in the 1990s to reduce the administrative burden on employers and HMRC.
Setting up a PSA avoids passing on an unexpected, and potentially demotivating, tax charge to employees. Where a PSA has been agreed with HMRC, this will remove the need for any reporting on the individual’s P11D.
The items that can be included in the PSA must meet one of three criteria: minor, irregular or impracticable to apply PAYE or apportion between the employees receiving the benefit. Irregular benefits and expenses are those not paid at regular intervals, such as weekly or monthly. They’re also things employees do not have a contractual right to. Impracticable expenses, on the other hand, are benefits that are difficult to place a value on or divide up between individual employees.
Some examples include:
- Incentive awards, for example for long service
- Telephone bills
- Small gifts and vouchers
- Staff entertainment, such as a ticket to an event
- Non-business expenses while travelling overnight on business that are over the daily limit
- Relocation expenses over £8,000 (these are tax-free below £8,000)
- The cost of attending overseas conferences
- Expenses of a spouse accompanying an employee abroad
- Use of a company holiday flat
- Staff entertainment that is not exempt from tax or NICs
- Shared cars
- Personal care expenses, for example hairdressing
Costs that cannot be included are wages, high-value benefits like company cars, or cash payments such as:
- Round sum allowances
- Beneficial loans in a PSA
Plus, if you apply after the start of the tax, there are additional restrictions on what you can include.
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 the employer will pay the tax and National Insurance liability on agreed benefits.
BUT NOT TRAVEL COSTS FOR NON-EXECUTIVE DIRECTORS IN PUBLIC SECTOR
Until recently, HMRC allowed taxable travel expenses to be included in public sector PSAs in respect of normal commuting costs for Non-Executive Directors (NED). The Department of Business (BEIS) wrote to the bodies it oversees on 30 May 2019 instructing them that 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.
Note also that fees for NED roles in the public and private sectors are always required to be subject to tax and NI through the payroll, as this is income for the holding of an office so it cannot be invoiced and paid gross to the NED.
Do you utilise PSAs to minimise your employees’ tax liabilities? If you’d like to discuss your options with a reputable advisor, get in touch and we’ll be happy to talk through the possibilities.