What is a PSA agreement with HMRC?

With a PSA agreement in place, an employer can make a single annual payment that covers tax and National Insurance contributions (NICs) on minor, irregular or impracticable expenses or benefits on behalf of their employees.

But what is a PSA Agreement, what are the implications of having an agreement in place and what are the benefits of a PSA Agreement. Our team of expert accountants and business advisors have created this guide to PSA Agreements that reveals all. 

What is a PSA Agreement?

In general terms, PSA stands for “Payroll Settlement Agreement” or “PAYE Settlement Agreement”.

A Payroll Settlement Agreement is a voluntary agreement between an employer and HMRC. It is used when an employer wants to settle the tax and National Insurance contributions (NICs) on benefits and expenses provided to employees. 

Instead of reporting these items individually on each employee’s P11D form, the employer can include them in a PSA, simplifying the reporting process.

Under a PSA, the employer calculates the tax and NICs due on the items included in the agreement and makes a single payment to HMRC. This can cover a variety of expenses or benefits that are not covered by other reporting methods.

The benefits of a PSA agreement

The employee benefits from a PSA as they do not have to foot the tax costs of benefits. An employee will not have to pay for their staff party, nor will they have to pay taxes on any gifts they receive from the company (within a reasonable limit, but we’ll get to that later).

Now the employer benefits differently.

Although the employer now foots the tax cost (however small it may be), a PSA agreement guarantees a much lower amount of administrative responsibilities. The PSA agreement eliminates the need to include certain taxable benefits/expenses on an employee’s P11Ds, and instead submit an annual settlement.

This has the secondary benefit of reducing exposure to penalties and interest.

Tax reporting requirements on all expenses to all of your employees throughout the year takes a great deal of time, organisation and dedication. If an employer compliance inspection arrives from HMRC, you could face penalties for even the smallest mistake.

HMRC are excellent at what they do.

By making a PSA agreement with them, you allow your business to take the time at the end of the year to calculate all those taxable items (then double, triple and quadruple check those results) and submit them all at once.

What’s included in a PSA?

For an expense to qualify to be included in a PSA agreement, it must be:

  • Minor – Incentive awards and small gifts
  • Irregular – not paid regularly over a tax year
  • Impracticable – Impossible to allocate an absolute value to individual employees

Examples of qualifying expenses for PSA agreements;

  • Travel / Hotel expenses
  • Relocation expenses
  • Staff party/lunch/meal/entertainment
  • Long service awards
  • Staff prizes
  • Trivial benefits >£50 (eg. Wedding, Christmas or Birthday gifts)
  • Telephone bills

According to HMRC, their guidelines state that a PSA agreement can contain cash bonuses or major benefits. Here are some items that cannot be included in a PSA agreement:

  • Company cars
  • Low interest loans
  • Cash bonuses

How to get a PSA agreement

To obtain a PSA agreement, employers must contact HMRC directly.

In communication, an employer must outline the expenses and benefits that they wish to include within the PSA, and when both parties have reached an agreement, HMRC will send two copies of a P626 form.

Once signed by the employer and returned to HMRC, the agreement is settled. The employer will then receive one of the forms back and it will act as the PSA agreement between the employer and HMRC.

The PSA deadlines

There are many important deadlines regarding PSA agreements. Failure to meet these deadlines can either result in more work, incomplete PSA agreements, or even financial recriminations should your mistake fail to be rectified.

PSA application deadline – The application deadline for a PSA agreement is on the 5th of July. You must have submitted the PSA1 form no later than the 5th of July following the end of the tax year to successfully apply.

PSA payment deadline – The PSA payment deadline is on the 22nd of October. If you have failed to pay the tax and NICs due under the PSA agreement by this date you will be charged a varying amount of late penalties.

PSA approval dates- If your PSA is approved before the 6th of April, then you must use a P11D form to report expenses and benefits provided before the agreed date. This should report that:

  • You have already included your employee’s tax code
  • You have included these costs in their PAYE tax and national insurance contributions

An approved PSA agreement before the Tax Year

If you have already defined the benefits and expenses to be included in the PSA agreement and confirmed the deal with HMRC, then there is no problem at all.

For the tax year, all those predefined benefits and expenses can be included in the PSA agreement. You’ll simply tally up the totals, make a report and pay your annual lump sum to HMRC.

If it’s approved after the beginning of the tax year (as stated previously) you will need to complete the P11D form to include some of the benefits and expenses separately to ensure smooth continuity and avoid any financial recriminations.

Do I have to make a PSA agreement every year?

Not anymore.

Until the tax year 2019/20, it was common practice. Thankfully HMRC has reformed the way that PSA agreements work and allow them to continue in an “enduring agreement”.

This means both less work for businesses and HMRC. So it’s a win/win for everyone really!

The only reasons that businesses need to contact HMRC about their PSA agreements are either:

  • You want to amend, change or alter the PSA agreement
  • You want to cancel the PSA agreement

Want to learn more? 

If you want to learn more about whether a PSA agreement is right for you then get in touch with our team here