PAYE SETTLEMENT AGREEMENT – CAN IT BE USEFUL FOR YOUR BUSINESS?

Most of us are familiar with the P11D forms, filing requirement, payment deadlines etc. However not so many people are familiar with the PAYE Settlement Agreements. Some of us may never have heard of it.

A PAYE Settlement Agreement (“PSA”) allows employers to make one annual payment to cover all the tax and National Insurance due on minor, irregular or impracticable expenses or benefits (i.e. long service awards, telephone bills, staff entertainment that is not exempt, personal care expenses etc.), provided to employees. The PSA cannot include wages, regular benefits (i.e. van or car benefits), bonuses, round sum allowances. There are further restrictions on what items can be reported if the application for PSA is at the beginning of the tax year.

PSA is an enduring arrangement and once set up it will remain in place until cancelled by HMRC or the employer.

If a PSA is not already in place for a particular tax year then it must be registered with HMRC no later than by 6 July following the tax year.

The application for a PSA involves writing to HMRC detailing the benefits and/or expenses to be covered by the PSA. Once HMRC agrees on the items that can be covered, it will send back to the employer the draft copies of form P626. These two forms require the employer’s signature. Once they are signed, they need to be posted back to HMRC which will then authorize the request and issue a PSA.

It is however important to note that any benefits or expenses applied to be covered by the PSA but rejected by HMRC must be reported through the payroll or P11D forms.

Form PSA1 is usually used to calculate the tax and NIC on benefits and expenses provided. Although, there is no statutory deadline for submitting computations of the tax and NIC due under a PSA to HMRC, it is advisable to do it well in advance before the payment deadline which is 22 October following the end of the tax year (or 19 October if you do not pay electronically). If you miss this deadline, interest and penalties can be charged. 

If you don’t already have a PSA in place and miss this deadline, it is possible to make a voluntary disclosure and settlement for items you would have otherwise included in a PSA. However, in certain circumstances HMRC may impose penalties and will charge interest on amounts settled in this way. 

Blog written by Maria Mekseniene

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