A Paye Settlement Agreement (PSA) is an agreement between an employer and HM Revenue and Customs (HMRC) that enables the employer to settle the tax and National Insurance (NI) on certain expenses and benefits paid to their employees. A PSA is necessary when an employer provides the employees with non-cash benefits or expenses.

Non-cash benefits such as company cars, health insurance, and gym memberships, are taxable perks and should be declared by the employee in their tax returns. However, if an employer wants to cover the cost of these benefits or expenses, they can opt to pay the tax and NI on behalf of their employees through a PSA. In this way, the tax and NI paid on these benefits or expenses will not result in an additional burden for the employee.

When should a PSA be established?

A PSA is not compulsory, but it is recommended when an employer provides their employees with taxable non-cash benefits or expenses. The following are some instances when a PSA is advisable:

1. Annual events

When an employer hosts annual events such as a Christmas party, a summer barbecue, or a team-building event, the cost of these events is taxable. A PSA can be established by the employer to cover the tax and NI on behalf of the employees.

2. Minor benefits

If an employer provides their employees with minor benefits such as a gift voucher, a box of chocolates, or a bouquet of flowers, these benefits are also taxable. A PSA can be set up to cover the tax on these minor benefits.

3. Travel and subsistence expenses

When an employer reimburses their employees for travel and subsistence expenses such as hotel bills, food, and drink, these expenses are taxable. A PSA can be established to cover the tax on these expenses.

4. Company cars

When an employer provides their employees with company cars, the cost of the car and its maintenance is taxable. A PSA can be set up to cover the tax on these benefits.

How to establish a PSA

To establish a PSA, employers need to write to HMRC with the details of the benefits and expenses that they wish to include in the agreement. HMRC will then assess the application and provide a letter outlining the agreed terms of the PSA.

Employers are advised to establish a PSA by April 5 after the end of the tax year in which the benefits and expenses were provided. However, if an employer misses this deadline, they can still apply for a PSA, but additional taxes and penalties may apply.

In conclusion, a PSA is necessary when an employer provides their employees with taxable non-cash benefits or expenses. It enables the employer to settle the tax and NI on these benefits and expenses on behalf of the employees, relieving the employees of the burden of additional taxes. Employers are advised to establish a PSA by April 5 after the end of the tax year in which the benefits and expenses were provided.