A payroll settlement agreement (PSA) is used by employers to declare and pay the tax and NIC due on benefits that they don’t want the employee to be taxed on.
These may be one-off benefits paid on an irregular basis, such as the use of a company flat for a short period, or a holiday. The PSA can also be used where the value of the benefit exceeds the statutory exemption, such as for taxi fares, non-trivial gifts, or a staff party that exceeded the allowance of £150 per head.
The cost to the employer of using a PSA is significant, as the tax and NIC due on the benefit must be grossed-up. For a taxpayer who pays income tax at 45%, the tax and NIC can amount to 107% of the value of the benefit provided. However, this cost needs to be set against the savings in administrative time and employee goodwill.
Until recently the PSA had to be arranged using the form P626 and entered into no later than 5 July following the tax year for which the PSA relates.
On 6 April 2023, HMRC launched a new online service to apply for a PSA. Beware of using this service as it appears to be quite insecure. All that is needed to apply is the name and address of the business plus a telephone number and the PAYE reference number.
If you do use this new online facility to apply for the PSA, the finalized agreement will be sent by post, although you will get a confirmation of your application by email.
The tax and NIC due under the PSA must be paid by 22 October following the tax year it refers to. When making this PSA payment you must use the 14-character charge reference number shown on the pay slip sent by HMRC. This always begins with the letter ‘X’, for example, XB013456798712.