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Dec

PAYE Settlement Agreement – a simplification of procedures

Published by friendadmin

In Simon Littlejohns’ latest blog he takes a look at the sometimes complicated area of employee expenses and benefits and gives an overview of the PAYE Setttlement Agreement which serves to simplify the process.

Planning and actions

  • If an employer wishes to ensure that none of its employees have an income  tax or NI labiality in respect of the incentives they receive a simple way of achieving this is to enter in to a PSA with HMRC;
  • This can be set up immediately and care taken to ensure that all items are included in line with the notes below; and
  • In doing this the administration burden for the employer will be reduced and the employees will receive their awards free and clear of any income tax or NI liabilities.

General

If an employer wants to ensure that the individuals do not have any income tax and NI liabilities in respect of the incentives the employer could apply to HMRC for a PSA. Such an agreement would also cut down on the administration burden for the employer.

What is a PSA?

A PSA is a flexible scheme arrangement which would enable the employer to settle the PAYE and NI liabilities due to HMRC on three types of expense and benefit:

  • Minor items; or
  • Irregular items; or
  • Items it’s impractical to operate PAYE on or to value for P9D/P11D purposes.

If HMRC agrees to a PSA for the incentive the employer will not have to take any of the following steps:

  • Include the item on an employee’s form P11D or P9D; or
  • Put the item through your payroll to work out any PAYE tax or Class 1 NICs due; or
  • Pay Class 1A NICs on the item at the end of the tax year.

Instead the employer will settle the income tax and NICs due on the items covered by a PSA with a single payment which includes both:

  • The tax due on the incentive covered by the PSA – this tax would normally be payable by the employee and the tax the employer pays must be ‘grossed up’ taking account of the tax rates payable by the employees covered by the PSA; and
  • Class 1B NICs, calculated not just on the value of the incentives covered by the PSA but also on the tax paid under the PSA – this is because paying an employee’s tax liability counts as providing them with a further taxable benefit.

There are only three categories of expenses and benefit which can be included in a PSA. With regard to incentives the ‘irregular item’ head would appear to be the most relevant. The employer would need to be careful in making an approach to HMRC to make sure that it puts itself in the best possible position to secure a PSA coving all relevant items. In view of this it may be that the employer will have to review, and possibly change, the manner and timing of the award of the incentives. 

How and when to apply for a new PSA

To apply for a new PSA, the employer should write to:

HMRC Local Compliance

Specialist Employer Compliance S0794
PO Box 3900
Glasgow
G70 6AA

The employer should explain that it wants a PSA and describe the expenses and benefits, i.e. the different incentives the employer would like the PSA to cover. Once HMRC have agreed the items to be covered by the PSA, they will authorise the agreement and send the employer a signed form P626.

An employer can apply for a PSA at any time, but the timing of the agreement will affect the items that can be covered.

If a PSA is agreed before the start of the tax year, then there are no limitations – beyond mentioned above – on the items that can be included in it.

If a PSA is agreed during the tax year, the employer cannot include items provided before the date of the agreement to which either of the following applies:

  • PAYE has or should have been operated on the item; or
  • The item has been reflected in the employee’s tax code for the year.

If a PSA is agreed after the end of the tax year but before 6 July, the employer cannot include any items provided during the tax year to which either of the following applies:

  • PAYE has or should have been operated on the item; or
  • The item has been reflected in the employee’s tax code for the year.
  • PSAs are annual agreements;
  • A new agreement is needed for each tax year;
  • If there have been no changes since the last PSA was agreed, the employer can simply sign a new PSA agreement in the same format as before; and
  • HMRC will send the employer a new PSA before the beginning of the tax year to which it applies.
  • An employer should inform HMRC straight away, by contacting the office that issued the PSA, if it wants to alter the items covered by its PSA; and
  • HMRC can agree to change the terms of a PSA before 6 July after the end of the tax year to which it applies.

Renewing a PSA

  • PSAs are annual agreements;
  • A new agreement is needed for each tax year;
  • If there have been no changes since the last PSA was agreed, the employer can simply sign a new PSA agreement in the same format as before; and
  • HMRC will send the employer a new PSA before the beginning of the tax year to which it applies.

Changing the terms of a PSA

  • An employer should inform HMRC straight away, by contacting the office that issued the PSA, if it wants to alter the items covered by its PSA; and
  • HMRC can agree to change the terms of a PSA before 6 July after the end of the tax year to which it applies.

 Calculating tax and NICs

  • Once the PSA has been authorised and the employer has received form P626 from HMRC, the next step is to calculate the tax and NICs that will be due;
  • There are four steps involved in working out the total amount payable to HMRC under a PSA. The employer must:
    • Calculate the total value – including VAT – of the expenses and benefits included in its PSA;
    • Calculate the tax due on the items covered by the PSA. Note that the tax due will differ depending on how many employees pay tax at the basic rate and how many pay at the higher or additional rate;
    • ‘Gross up’ this total tax figure – the employer will have to take account of whether employees pay tax at the basic, higher or additional rate; and
    • Calculate Class 1B NICs as a fixed percentage (13.8 per cent) of the combined total of (i) the value including VAT of all the items in the PSA that attract a Class 1 or Class 1A NICs liability, and (ii) the grossed-up tax total from step two above.
  • HMRC will finalise and confirm with the employer the total tax and NICs payable between 6 July and 19 October, and the date by which payment must reach HMRC (22 October if the employer pays by electronic means); and
  • To make sure HMRC can agree the amount due by 19 October, the employer should inform them of the value of the items included in its PSA at the earliest opportunity. The employer can do this using form PSA1.

Simple calculation

The following example (taken from the HMRC website) shows how to calculate the amounts due.

  • A hypothetical business with 100 employees, 80 of whom pay tax at the basic rate, 20 of whom pay at the higher rate;
  • Each of the 100 employees receives expenses and benefits with a value of £50;
  • All the expenses and benefits attract either a Class 1 or Class 1A NICs liability; and
  • The sample calculation uses the tax rates applicable to the 2012-13 tax.
PSA Table

PSAs and statutory payments

In rare circumstances, having a PSA in place can affect an employee’s entitlement to any of the five statutory payments:

  • Statutory Sick Pay;
  • Statutory Maternity Pay;
  • Ordinary Statutory Paternity Pay;
  • Additional Statutory Paternity Pay; and
  • Statutory Adoption Pay.

Paying tax and NICs under a PSA

  • The tax and Class 1B NICs owed under a PSA are to be paid to HMRC no later than 19 October following the tax year to which the PSA relates (22 October if the employer pays by electronic means);
  • There are special rules to follow when paying PSA tax and NICs;
  • The employer should not use its normal PAYE Accounts Office reference number as the payment will credit to the wrong account and this will cause delays in crediting the employer’s  PSA account; and
  • The HMRC guide ‘How to make PAYE Settlement Agreement payments’ (www.hmrc.gov.uk/payinghmrc/psa.htm) explains exactly what an employer must do. 

Taxed award schemes (‘TAS’)

  • Employers providing incentive awards can enter into special accounting arrangements for non-cash awards – a TAS;
  • The employer who makes awards enters into a contract with HMRC to account directly for tax on the awards;
  • The employer has the option of accounting for tax at either the basic rate or the higher rate on the grossed up value of the awards it makes;
  • Although an employer can use the TAS arrangements to pay the tax on non-cash incentive awards it provides to its employees, it is likely that in most cases it will prefer to enter instead into a PSA;
  • Unlike awards covered by a PSA non-cash awards and the tax paid on them under TAS arrangements remain assessable on the employee. So the employee has to enter the grossed-up value of the award and the tax paid on it on any tax return; and
  • Normally no further tax is due from an employee unless the provider has only entered into a basic rate TAS and the recipient of the award is liable at the higher rate.

 

For more information on PSAs please contact Simon Littlejohns