Are you preparing your P11d forms for 2012/13? Have you incurred expenditure on an annual event(s) for your employees but went over the threshold of £150 per head for tax exemption and you do not want your employees to suffer tax on the event? If so, a PAYE settlement agreement may be for you.

What is a PAYE settlement agreement or PSA?

A PAYE settlement agreement or PSA is a flexible scheme an employer can use to settle any PAYE tax and NICs due to HMRC on three groups of expenses and benefits:

1. Minor items: e.g. a small present for an employee in hospital or an employee's use of a pool car where the conditions for tax exemption don't apply; or
2. Irregular items: e.g. expenses of a spouse occasionally accompanying an employee abroad, or relocation expenses in excess of the £8,000 tax exemption threshold; or
3. Impractical items: e..g items where it is impracticable to operate PAYE on or determine a value for P9D or P11D purposes, such as shared benefits (like shared cars or taxi journeys, for example) that are difficult to attribute to individual employees.

If HMRC agrees to include an expense or benefit in a PSA, you will not have to include the item on an employee's form P11D or P9D and pay Class 1A NICs on the item at the end of the tax year, or put the item through your payroll to work out any PAYE tax or Class 1 NICs due.

Instead, you settle the tax and NICs due on the items covered by a PSA with a single payment that includes both:

1. the tax due on the expenses and benefits covered by the PSA - this tax would normally be payable by your employee (usually through their tax code) and the tax you pay must be 'grossed up' taking account of the tax rates payable by the employees covered by your PSA; and
2. Class 1B NICs, calculated not just on the value of the items covered by the PSA but also on the tax paid under the PSA - this is because paying an employee's tax liability counts as providing them with a further benefit.

What cannot be included in a PSA?

HMRC won't include any of the following items:

1. cash payments - including salary, wages, bonus, or other payments such as long service awards;
2. large benefits provided regularly to individual employees, such as company cars or beneficial loans;
3. round-sum allowances - lump sums provided to an employee to take care of all their expenses in a tax year;
4. shares;
5. items on which tax has already been deducted through PAYE;
6. items which are already reflected in an employee's tax code; or
7. profits arising from various mileage payment schemes and other regular items arising in Employee Car Ownership Schemes.

How can I apply for a PSA?

To apply for a new PSA, you can write to HMRC  explaining that you require a PSA and describe the expenses and benefits you would like the PSA to cover. Once HMRC have agreed the expenses and benefits to be covered by your PSA, they will authorise the agreement and send you a signed form P626.

When can I apply for a PSA?

You can apply for a PSA at any time, but the timing of the agreement will affect the items that can be covered.

1. If a PSA is agreed before the start of the tax year, then there are no limitations, other than falling in to the three categories above, on the expenses and benefits that can be included in it.
2. If a PSA is agreed during the tax year, you cannot include items provided before the date of the agreement to which either of the following applies:

PAYE has or should have been operated on the item; or

The item has been reflected in the employee's tax code for the year.

1. If a PSA is agreed after the end of the tax year but before 6 July, you cannot include any items provided during the tax year to which either of the following applies:

PAYE has or should have been operated on the item; or

The item has been reflected in the employee's tax code for the year.

What are the deadlines for a PSA?

Details of how to calculate the tax and NICs under a PSA can be found at HMRC. You will need to submit your calculation and can use HMRC form PSA1 to advise HMRC of your liability.

This should be done at the earliest opportunity after the end of the tax year. Payment must reach HMRC by 19 October after the tax year to which it relates (22 October if you pay by electronic means).

More information

Further information on PAYE settlement agreements can be found at HMRC: PSAs.

If you have any questions or would like advice or help preparing your request to HMRC please contact us.