Settle the tax with a PSA

Jun 12, 2023

Occasionally you may reward your employees with something special such as a holiday or a hamper. If the value exceeds the tax-free amount permitted under the rules for say long service awards, trivial benefits or staff suggestions it will be taxable.

To avoid your employees getting a nasty shock in their pay packet you can bear the tax and NIC on their behalf under a payroll settlement agreement (PSA) negotiated with HMRC. The PSA procedure can also be used where the value of certain benefits provided to a group of employees such as taxis home after working late or a staff party exceeds the exempt amount.

Before entering into a PSA be aware that the costs can be significant as the tax and NIC due on the benefit must be grossed up. For an additional rate taxpayer the tax and NIC can amount to 115% of the value of the benefit provided. However this cost should be weighed against the savings in administrative time and employee goodwill.

Until recently the PSA had to be applied for using the paper form P626 but this can now be done online. Whether you use the paper form or the online facility HMRC will send the finalised agreement by post, although a confirmation or receipt of your application will be sent by email or letter.

To set up a PSA for occasional benefits provided in 2022-23 you must enter into the agreement with HMRC no later than 5 July 2023. The tax and NIC due under that PSA must be paid by 22 October 2023.

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