Employee benefits and staff rewards remain an important part of attracting, retaining and motivating employees. However, making sure those benefits are taxed correctly can often create a challenge for employers, particularly where the employer wishes employees to enjoy the benefit without suffering an unexpected personal tax charge.
Tessa Brown, Tax Advisory Manager looks at one area that’s frequently overlooked but can be particularly helpful- the PAYE Settlement Agreement (PSA).
Over the summer, HMRC launched a Call for Evidence on how PAYE Settlement Agreements operate in practice signalling that they are actively looking at how PSAs are being used, what employers are including, and whether benefits are being reported through the correct route. Making now an ideal time to review your arrangements for employee benefits.
What is a PAYE Settlement Agreement (PSA)?
A PAYE Settlement Agreement is a voluntary agreement between an employer and HMRC which allows the employer to settle the Tax and National Insurance Contributions on certain expenses and benefits provided to employees – in one simple payment.
Instead of reporting these items through payroll or annual employee benefits reporting – and therefore requiring employees to bear the tax personally – with a PSA, the employer pays the tax and NIC on behalf of employees.
PSAs are generally intended for benefits or expenses that are:
- Minor
- Irregular
- Impracticable to allocate to individual employees
Common examples include staff entertaining, seasonal gifts, hampers and employee recognition awards that fall outside the available exemptions.
How can a PSA benefit your business and your employees?
For many employers, a PSA can provide both administrative and employee relations benefits.
From an administrative perspective, a PSA can simplify the reporting of certain taxable benefits that can be difficult – or would be impractical – to allocate between employees. Rather than reporting numerous small items through payroll or annual employee benefits reporting, employers can instead deal with them through a single annual PSA calculation. Whilst records should still be retained to support the calculation and determine the appropriate tax treatment, a PSA can often provide a more practical solution than individual reporting.
However, the most significant benefit is often the employee experience.
Without a PSA, employees may receive a benefit or reward and only become aware of the associated tax consequences much later through an adjustment to their tax code once form P11D has been filed. This unexpected tax cost arising long after the benefit has been received often means the reward quickly loses its appeal.
In contrast, if a PSA is appropriately used, the employer settles the Income Tax and Class 1B National Insurance Contributions on behalf of employees. Meaning the employee receives the benefit without a personal tax charge and without the risk of a later tax adjustment.
This can be particularly valuable where employers wish to reward employees, celebrate success, recognise achievements or provide occasional benefits without creating an unwelcome tax consequence for the recipient.
For many organisations, PSAs therefore support both compliance and employee engagement objectives.
Why review your PSA arrangements now?
PSAs remain a helpful compliance tool, but they are not a substitute for normal PAYE, P11D or payrolling processes. HMRC’s recent Call for Evidence highlights that employers may be applying the rules in different ways and that there can be uncertainty about what should, and should not, be included.
This makes now a sensible time to review your existing PSA arrangements, check whether the agreement still reflects the benefits being provided and identify whether any items should instead be dealt with through payroll, P11D reporting or payrolling.
3 signs it might be time to consider a PSA
Many organisations already provide benefits and rewards that could potentially be included within a PAYE Settlement Agreement. Whilst exemptions should always be considered first, the following are common indicators that a review may be worthwhile.
- Employee gifts regularly exceed £50
Where employers provide hampers, gift vouchers or other rewards, it is easy to assume the trivial benefits exemption applies. However, VAT and delivery costs can sometimes push the true cost above the £50 threshold so it’s important that this is factored in.
- Employees receive thank-you meals or rewards
Meals, vouchers and gifts provided in recognition of services are often taxable even where the value involved is relatively modest, so check the circumstances of the gift.
- Team meals or social events become more regular or more expensive
The cost of informal team gatherings can accumulate throughout the year and may not always fall within available exemptions.
One-off meals are often assumed to be covered by the annual functions’ exemption, however, because these events are not recurring annual functions, the £150 exemption is unlikely to be available.
Where an employer’s objective is to reward employees without creating a later tax charge for employees, a PSA may provide a practical solution.
What should employers do next?
Whilst we await comment from HMRC on their recent call to action, this offers an ideal opportunity to review your approach to employee benefits, expenses and rewards.
Key areas to consider include staff entertaining, employee gifts, recognition awards, team events, milestone celebrations and any other benefits provided outside payroll.
By taking the opportunity to check whether taxable benefits are being provided, you can determine whether a PSA could be helpful to improve the employee experience and/or reducing the administrative burden of employer year end reporting.
For those with existing PSA agreements, it’s an opportunity to check whether your existing agreement remains fit for purpose and reflect the benefits being provided.
Employers wishing to include benefits for a tax year will need have agreed a new PSA, or amended an existing PSA, by 6 July following the end of that tax year. Early application/amended is always recommended and this is something we would be happy to help with.
We’re here to help
Perhaps you already provide benefits and rewards that could potentially be included within a PSA without realising it. Maybe you already have a PSA in place, but you’ve not reviewed whether it still covers the right categories of benefit.
Either way, our Employment Tax team can help.
To discuss your existing employee benefits arrangements, review an existing PSA or consider whether a PSA might be right for your organisation – get in touch with Tessa or one of the team today by emailing hello@scruttonbland.co.uk or call 0330 058 6559
