PAYE settlement agreements: when should employers use a PSA?

PAYE settlement agreements can be useful if your business gives employees small, occasional or hard-to-divide expenses and benefits.

Instead of reporting those items individually through payroll or on P11D forms, a PSA lets you make one annual payment to HMRC. This covers the tax and National Insurance due on qualifying items.

However, PSAs are not suitable for everything. They are designed for specific types of expenses and benefits. They also come with deadlines, so it is worth reviewing any staff gifts, benefits or expenses before the summer.

In this article, we explain how PAYE settlement agreements work, what can and cannot usually be included, and when employers should consider using one.

What is a PAYE Settlement Agreement?

A PAYE Settlement Agreement, often shortened to PSA, is an arrangement between an employer and HMRC.

It allows the employer to settle the tax and National Insurance due on certain employee expenses and benefits in one annual payment.

This can be helpful where the employer does not want employees to face a personal tax charge. It can also reduce administration where reporting every item separately would be difficult.

If an item is covered by a PSA, the employer does not need to include it in payroll or on an employee’s end-of-year P11D form. Instead, the employer calculates the tax and Class 1B National Insurance due and pays HMRC directly.

What can PAYE settlement agreements cover?

HMRC says that expenses and benefits included in a PSA must be minor, irregular or impracticable.

These words have specific meanings.

Minor expenses and benefits

Minor expenses and benefits are usually smaller items that are not worth the administrative effort of reporting separately for each employee.

Examples may include:

• Small gifts and vouchers
• Staff entertainment, such as a ticket to an event
• Some incentive awards
• Telephone bills

However, some small benefits may already be exempt under the trivial benefits rules. If a benefit qualifies as a trivial benefit, it does not need to go into a PSA.

Irregular expenses and benefits

Irregular expenses and benefits are not paid at regular intervals during the tax year. They are also not things employees have a contractual right to receive.

Examples may include:

• Relocation expenses above the tax-free limit
• The cost of attending overseas conferences
• Expenses for a spouse or partner accompanying an employee abroad
• Use of a company holiday flat

These items may only arise occasionally. Because of this, it may be simpler to deal with them through a PSA if they meet HMRC’s criteria.

Impracticable expenses and benefits

Some expenses and benefits are difficult to value or divide between individual employees.

For example, staff entertainment may not be easy to split fairly if a group benefit is provided. Shared cars or personal care expenses can also create practical problems.

In these cases, a PSA can help the employer settle the tax centrally rather than trying to allocate the correct amount to each employee.

What cannot be included in a PSA?

A PSA is not a way to avoid normal payroll or benefit reporting rules.

HMRC says you cannot include wages, high-value benefits such as company cars, or cash payments such as bonuses, round sum allowances and beneficial loans.

This is an important point. If something is really salary, a bonus, a cash allowance or a regular contractual benefit, a PSA is unlikely to be appropriate.

Those items will usually need to be dealt with through payroll, P11D reporting or another correct route.

Why would an employer use a PSA?

A PSA is often useful when an employer has tried to do something positive for staff, but the tax treatment is not straightforward.

That might include a staff event, a gift, a non-cash voucher, or another one-off benefit provided during the year. In some cases, the item may be exempt. In others, it may need to be reported through payroll or on a P11D.

A PSA gives employers another option for certain qualifying items. Instead of passing a small tax charge on to the employee, the business can settle the tax and National Insurance directly with HMRC.

This can be especially helpful where the benefit was meant as a gesture of thanks. Few employers want a staff gift or event to result in an unexpected tax bill for the recipient.

The important point is that a PSA only works if the right items are included. It is worth checking the rules before you assume that a benefit can be dealt with this way.

When is the PSA deadline?

The deadline for applying for a PAYE Settlement Agreement is 5th July following the first tax year to which it applies.

For example, if you want a new PSA to apply for the 2025/26 tax year, HMRC gives the application deadline as 5th July 2026.

The payment deadline comes later. You must pay any tax and National Insurance due under the PSA by 22nd October after the tax year it applies to. If you pay by post, the deadline is 19th October.

You may face interest or penalties if you miss the payment deadline.

Do you need to renew a PSA every year?

Once you have a PSA, you do not normally need to renew it every tax year.

However, you still need to tell HMRC what you owe each year. You also need to check that the expenses and benefits you want to include are covered by the agreement.

If your business starts providing different types of benefits, you may need to change the PSA. HMRC allows employers to apply online to change or cancel a PSA.

This is why an annual review is sensible. It helps you check what has been provided, what is exempt, what belongs in the PSA, and what needs to be reported elsewhere.

PSA, P11D or payroll?

One of the most common problems for employers is knowing which route to use.

Some employee expenses and benefits are exempt. Some must be reported on a P11D or go through the payroll. Others may be suitable for a PSA.

The right treatment depends on the type of benefit, how it was provided, whether it was contractual, and whether it can be fairly allocated to individual employees.

For example, a small non-cash gift may be exempt if it meets the trivial benefits rules. A company car would normally need to be dealt with through the usual benefits process. A one-off staff entertainment cost that is difficult to split may be better suited to a PSA.

The key is not to assume. A small item can still have tax consequences if it does not meet the exemption criteria.

What records should employers keep?

Good records make PSA calculations much easier.

Employers should always keep clear details of:

• What was provided
• When it was provided
• Who received it, where this is known
• The total cost, including VAT where relevant
• Whether any exemption may apply
• Whether the item has already been reported through payroll or on a P11D

This helps prevent double reporting. It also makes it easier to explain your figures if HMRC asks for more information.

It is better to keep these records during the year, rather than trying to reconstruct everything after the event.

Should you consider a PSA?

You should consider reviewing PAYE settlement agreements if your business gives staff gifts, entertainment, vouchers, occasional benefits or expenses that may not fit neatly into normal payroll reporting.

This is especially important before the 5th July deadline.

A PSA will not be right for every employer. However, it can be a practical way to deal with certain benefits and expenses while keeping employees out of the tax-reporting process.

The main point is to review the position early. That gives you time to decide what is exempt, what needs to be reported, and whether a PSA is worth applying for or updating.

Need help with PAYE settlement agreements?

PAYE settlement agreements can make life easier, but only if they are used correctly.

If your business has provided staff gifts, benefits, expenses or entertainment costs during the year, THP’s friendly accountants can help you check how they should be treated before the deadline.

Our friendly team member can also help if you need wider support with payroll reporting, P11Ds or payroll outsourcing. Simply call us today on 0800 6520 025 or contact us using the form below.