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PAYE Settlement Agreements

As an employer, you may wish to reward your employees for their work in other ways than cash bonuses.

In general, rewards in the form of outings, meals, or other perks are likely to be taxable. However, you can agree in advance with HMRC to provide a gift and pay the employees tax on it.

This is done as a single payment each year covering all the relevant perks and the tax (at the various employees’ highest rates of tax).

It is however important that you inform HMRC of your intention to embark on this route. Otherwise, all such perks should properly be subject to tax and National Insurance Contributions via form P11D, or, in some cases the payroll.

This can be achieved by entering into a PAYE Settlement Agreement (PSA) with HMRC.

A contract is signed between the employer and HMRC agreeing that:

  • The employer pays the employee’s liabilities.
  • No P11D entries are made in respect of the benefit.
  • The employee should not report the benefit on their Self Assessment Tax Return.

This is a reasonably expensive process, as the tax paid is considered part of the gift, and Class 1B National Insurance Contributions, (payable by the Employer only) currently due at 13.8% is also charged on the combined value of the gift and the associated income tax arising.

A PSA should be applied for before the 6 July following the end of the tax year in which the benefits were provided (the P11D submission deadline), and the computations submitted generally by 31 July or 31 August as specified by HMRC.

The Income Tax and Class 1B NIC must be paid to HMRC by 22 September following the end of the Tax Year if paying electronically, or by 19 September if paying by cheque.

Why you should contact us

Our experienced team of former tax inspectors can assist with firstly notifying HMRC that you intend to enter into a PSA and secondly carrying out the necessary computations.

For more information or help from one of our tax specialists, please contact us using our enquiry form.