Could PAYE settlement agreements stop your employees from experiencing unexpected tax bills?

Published by George Cannon on 11 September 2023

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Businesses are suffering increased costs and employers are looking for various ways to reward their employees and keep them engaged beyond pay rises and bonuses. The issue however is that a lot of these alternative methods can be caught by the benefit in kind (BIK) rules.

BIK’s need to be reported on a form P11D and the employees concerned are taxed on the cash equivalent of the BIK provided – which is not ideal when the aim of the benefit was to provide an additional reward to the employee concerned. A PAYE settlement agreement could be the answer!

What is a PAYE settlement agreement?

A PAYE Settlement Agreement (PSA) allows employers to make one annual payment to HMRC to cover the Tax and National Insurance Contributions (NIC) due on selected minor, irregular or impractical expenses or benefits that they provide to their employees.

Why use a PAYE settlement agreement?

As most non cash benefits provided to employees will be taxable on the employee, a PSA can be a great way to cover the Tax and NIC due on the employees behalf and avoid upsetting them with an unexpected tax bill.

PSA’s work best on items where it is not the employer’s intention for there to be a Tax or NIC consequence for the employee. For example, an employer may provide an employee with a long service award that does not meet the criteria to be provided tax free. Whilst the employer’s intention is to provide its employee with a gesture of its appreciation for their years of hard work, an unexpected tax bill for the individual is likely to undo some of the goodwill generated from the gift. By including the gift on a PSA the employee will not be liable to Tax or NIC and the employer retains the goodwill of the employee.

PSA’s are often used to cover items such as employee of the month awards, incentive schemes or even staff entertaining such as Christmas parties that have exceeded the annual £150 per head tax free limit.

How to get a PAYE Settlement Agreement

An employer can apply online for a PSA, or an agent can do so on their behalf. Once HMRC have checked and approved the application, the employer will receive a confirmation email or letter, with the PSA following shortly after by post. The agreement will then continue until either the employer or HMRC apply to change the agreement or cancel it.

The PSA application needs to be made by 5 July following the first year that it applies to, although if a PSA is applied for in advance it can increase the types of items that can be included on the form. The PSA form itself will then need to be completed and submitted by 31 July, with the Class 1B NIC payable by 22 October (if paid electronically) following the end of the tax year.

Is a PAYE settlement agreement right for your business?

Whilst it is beneficial for the employees concerned to have certain items included on a PSA to avoid a Tax or NIC liability, it can be expensive for employers. Not only are they paying the Tax and NIC on the employee’s behalf, they are also required to gross up these payments to take account of the added benefit of paying these amounts on the employee’s behalf. The business will then pay Class 1B NIC on the total amount calculated at a rate of 13.8% for the 2023/24 tax year.

If you would like to know more about this topic, please get in touch with us today.

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