A PAYE (Pay As You Earn) Settlement Agreement (PSA) is a special agreement between an employer and HM Revenue & Customs (HMRC) which allows the employer to make one annual payment to cover all the tax and National Insurance due on small, irregular, impracticable expenses or benefits for their employees.
Why using a PAYE Settlement Agreement can be beneficial
- It’s simple and efficient, because instead of processing each small benefit or expense through payroll individually, the employer can make a single payment through the PSA and thereby reduce their admin.
- PSAs can reduce the amount of paperwork and record-keeping that the employer must do and the employer does not need to include these items on P11D employee benefits forms.
- Since employers cover the tax and National Insurance Contributions (NICs) that would normally be paid by the employee, it can be a cost-effective benefit to the employee without significant extra costs for the employer.
- By the employer covering the tax and NICs, employees receive these small benefits or expenses tax-free. Who doesn’t feel more motivated and satisfied by saving tax?
- PSAs provide a flexible way to handle various types of expenses and benefits, covering a wide range of items, such as staff entertainment or small gifts.
Keep in mind that while PSAs offer several advantages, they also require the employer to calculate the tax due and make a payment to HMRC, which might increase administrative duties in some cases. It’s important to consider these factors and potentially seek professional advice before deciding to use a PAYE Settlement Agreement.