PAYE Settlement Agreements Explained | PSA

If your business provides small or irregular perks to staff, you may have come across PAYE settlement agreements. A PAYE settlement is a formal arrangement with HMRC that allows an employer to make a single annual payment covering certain tax liabilities on behalf of employees.

Instead of individual employees paying tax through their regular payroll, a PAYE settlement agreement PSA enables employers to settle the income tax and related National Insurance in one combined payment after the end of the tax year. This can reduce the administrative burden of reporting benefits that would otherwise need to be processed individually.

This guide explains how PAYE settlement agreements work, what they can include, how the calculations are handled, and what employers need to consider before entering into one.

What Is a PAYE Settlement Agreement?

A PAYE settlement agreement PSA is an administrative arrangement between an employer and HMRC. It allows the employer to pay the tax due on certain taxable benefits and expenses provided to employees, rather than passing that tax burden to individual employees.

In practical terms, PAYE settlement agreements:

• Cover specific benefits provided during a tax year
• Allow the employer to make a single annual payment to HMRC
• Include both income tax and Class 1B National Insurance
• Remove the need to adjust each employee’s tax code for those items

A PAYE settlement agreement does not replace regular payroll. Employers must still operate PAYE for salary and other taxable items processed through monthly PAYE. Instead, it is designed to deal with certain benefits that are minor, irregular or difficult to allocate to individual employees.

Once agreed, the PSA usually remains in place for future tax years unless amended or cancelled.

How Does a PAYE Settlement Agreement Work?

A PAYE settlement agreement PSA is an administrative arrangement between an employer and HMRC. Once agreed, it allows the employer to make a single annual payment covering the income tax and Class 1B National Insurance due on certain benefits provided during the tax year.

In practice, the process involves:

• Agreeing a PAYE settlement with HMRC
• Identifying which benefits will be included
• Calculating the total tax liabilities arising
• Paying the full amount directly to HMRC after the end of the tax year

Under a PAYE settlement agreement, the employer rather than the individual employees pays the tax. This means the items included in the PSA do not need to be processed through regular payroll or collected via adjusted tax codes.

Employers must still operate PAYE for salary and other taxable items through monthly PAYE. A PSA does not replace payroll; it provides a structured way of dealing with certain benefits outside the regular payroll cycle.

What Expenses and Benefits Can Be Included?

Not every benefit can be included in PAYE settlement agreements. HMRC allows items that are minor, irregular or impracticable to process through payroll. Each category has a specific meaning. Employers should also consider whether an item qualifies as a tax exempt benefit provided under existing exemptions before including it in a PSA.

Minor Benefits

Minor employee benefits are small in value and not provided regularly. Examples may include:

• Small gifts
• Store vouchers provided occasionally
• Modest staff entertaining events
• Certain small non-cash benefits

These items may not justify adjusting individual employees’ payroll records.

Irregular Benefits

Irregular benefits are not provided on a routine basis. They may arise from specific events or circumstances during the tax year.

Examples can include:

• One-off staff entertaining events
• Annual events exceeding the exemption limit
• Certain expenses provided on a one-off basis

Because they are not part of regular payroll, including them in a PSA can reduce the administrative burden.

Impracticable Items

Impracticable items are those where allocating the correct taxable value to individual employees would be difficult.

This may apply where:

• The cost is shared across multiple employees
• The benefit is difficult to divide accurately
• The tax treatment would require complex adjustments

However, some items cannot be included in a PAYE settlement agreement PSA. These include:

• Cash payments or wages
• Benefits already processed through regular payroll
• High-value items such as company cars
• Items that must be reported through P11D

Employers must ensure only appropriate benefits are included.

PAYE Settlement Agreement Calculations and Tax Treatment

Accurate PAYE settlement agreement calculations are essential. Employers must determine the total tax liabilities on the benefits included in the PSA.

The calculation process typically involves:

• Identifying the taxable value of each benefit
• Applying the relevant income tax rate band for affected employees
• Grossing up the tax so the employer covers the full liability
• Adding Class 1B National Insurance contributions

Grossed up tax means the employer pays not only the original tax due, but also the additional tax that arises because the employer is settling it on behalf of the employee.

Where employees fall into different income tax rate bands, HMRC may require separated computations. This ensures the correct marginal tax rate is applied, including where Scottish and Welsh rates are relevant.

The final figure represents:

• Income tax due
• Class 1B National Insurance
• Total liabilities arising under the PSA

That total is then paid by the employer as part of the PAYE settlement arrangement.

Deadlines and Compliance Requirements

Timing is critical when operating a PAYE settlement agreement PSA.

Employers must:

• Apply to HMRC for a PAYE settlement agreement by 5 July following the end of the relevant tax year
• Submit the required calculations for the tax liabilities included
• Make payment by 19 October (if paying by post)
• Make payment by 22 October (if making an electronic payment)

The payment covers the income tax and Class 1B National Insurance due on the included benefits.

Accurate record keeping is essential. Employers should retain:

• Details of benefits provided
• Calculations supporting the grossed up tax
• Evidence of how the marginal tax rate was determined
• Confirmation of payment

Failure to meet deadlines may lead HMRC to levy interest, raise formal determinations or issue formal assessments. Careful planning and timely submission reduce the risk of penalties and adverse implications.

As part of wider HMRC submission support, employers should ensure all filings align with current regulations.

Benefits and Limitations of a PSA

For many employers, paye settlement agreements offer a practical way to simplify reporting.

Key benefits include:

• Reducing the administrative burden of adjusting individual employees’ tax codes
• Avoiding separate P11D reporting for included items
• Allowing the employer to settle tax liabilities through a single annual payment
• Removing the tax burden from employees for minor or irregular benefits

However, there are limitations. A PSA does not eliminate tax; it transfers responsibility to the employer. This means:

• The employer bears the cost of grossed up tax
• Class 1B National Insurance must still be paid
• Incorrect inclusion of benefits can create compliance risks

Employers should plan carefully around what to include in a PAYE settlement agreement PSA and review arrangements annually to ensure they remain appropriate.

How Goodwille Supports Employers with PSA Compliance

Operating PAYE settlement agreements requires careful documentation and accurate calculations. Errors can result in unexpected tax exposure or compliance issues.

At Goodwille, we support employers by:

• Advising on whether a PAYE settlement is appropriate
• Reviewing which benefits can be included
• Preparing PAYE settlement agreement calculations
• Assisting with HMRC applications and deadlines
• Ensuring accurate reporting and compliance with UK tax requirements

For businesses providing benefits to UK employees, structured guidance helps ensure tax liabilities are managed correctly and deadlines are met.

If you are considering a PAYE settlement agreement PSA or reviewing an existing arrangement, contact our team today who can provide support designed to your organisation’s obligations.