What is a PSA Agreement with HMRC?
Clear up the taxes around benefits and expenses with a PSA agreement.
With the advantages available for both employees and employers, it’s no wonder that businesses are asking themselves “What is a PSA agreement and how do I make one?”
The good news is that once you know how to make a PSA agreement, you’ll rarely have to tinker with it. Your business will reduce paperwork and administration from the size of a mountain to a yearly nuisance.
So let’s discuss PSA agreements, what else they are known as, the deadlines involved with them, and how they can improve your employer/employee relationship.
What is a PSA Agreement?
You may know a PSA agreement by its other name: a PAYE settlement agreement.
In short, this is an agreement between an employer and HMRC surrounding the regulation and compliance of taxes on employee expenses and benefits.
With a PSA agreement in place, an employer can make a single annual payment that covers tax and National Insurance contributions (NICs) on minor, irregular or impracticable expenses or benefits on behalf of their employees.
The benefits of a PSA agreement
We mentioned the benefits of a PAYE settlement agreement extend to both employees and employers for very different reasons.
Firstly, the employee benefits from a PSA as they do not have to foot the tax costs of benefits. An employee will not have to pay for their staff party, nor will they have to pay taxes on any gifts they receive from the company (within a reasonable limit, but we’ll get to that later).
Now the employer benefits differently.
Although the employer now foots the tax cost (however small it may be), a PSA agreement guarantees a much lower amount of administrative responsibilities. The PSA agreement eliminates the need to include certain taxable benefits/expenses on an employee’s P11Ds, and instead submit an annual settlement.
This has the secondary benefit of reducing exposure to penalties and interest.
Tax reporting requirements on all expenses to all of your employees throughout the year takes a great deal of time, organisation and dedication. If an employer compliance inspection arrives from HMRC, you could face penalties for even the smallest mistake.
HMRC are excellent at what they do.
By making a PSA agreement with them, you allow your business to take the time at the end of the year to calculate all those taxable items ( then double, triple and quadruple check those results) and submit them all at once.
Staying HMRC compliant is one of the greatest assets a business can have!
What’s included in a PSA?
You’ve probably guessed it already, but the guidelines around what is in a PSA agreement are fairly strict but very straightforward. For an expense to qualify to be included in a PSA agreement, it must be:
Incentive awards and small gifts etc.
Items not paid regularly over a tax year and that employees may not have a contractual right to receive.
Impossible to allocate an absolute value to individual employees.
That last point can be a bit difficult to pin down without some real world examples. So let’s examine some samples of qualifying expenses for PSA agreements:
Travel / Hotel expenses
Long service awards
Trivial benefits >£50 (eg. Wedding, Christmas or Birthday gifts)
According to HMRC, their guidelines state that a PSA agreement can contain cash bonuses or major benefits. So here are some items that cannot be included in a PSA agreement:
Low interest loans
How to get a PSA agreement
To obtain a PSA agreement, employers must contact HMRC directly.
In communication, an employer must outline the expenses and benefits that they wish to include within the PSA, and when both parties have reached an agreement, HMRC will send two copies of a P626 form.
Once signed by the employer and returned to HMRC, the agreement is settled. The employer will then receive one of the forms back and it will act as the PSA agreement between the employer and HMRC.
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The PSA deadlines
As always with HMRC, there are many important deadlines regarding PSA agreements. Failure to meet these deadlines can either result in more work, incomplete PSA agreements, or even financial recriminations should your mistake fail to be rectified.
PSA application deadline
The application deadline for a PSA agreement is on the 5th of July. You must have submitted the PSA1 form no later than the 5th of July following the end of the tax year to successfully apply.
PSA payment deadline
The PSA payment deadline is on the 22nd of October. If you have failed to pay the tax and NICs due under the PSA agreement by this date you will be charged a varying amount of late penalties.
PSA approval dates
If your PSA is approved before the 6th of April, then you must use a P11D form to report expenses and benefits provided before the agreed date. This should report that:
You have already included your employee’s tax code
You have included these costs in their PAYE tax and national insurance contributions
An approved PSA agreement before the Tax Year
If you have already defined the benefits and expenses to be included in the PSA agreement and confirmed the deal with HMRC, then there is no problem at all.
For the tax year, all those predefined benefits and expenses can be included in the PSA agreement. You’ll simply tally up the totals, make a report and pay your annual lump sum to HMRC.
If it’s approved after the beginning of the tax year (as stated previously) you will need to complete the P11D form to include some of the benefits and expenses separately to ensure smooth continuity and avoid any financial recriminations.
Do I have to make a PSA agreement every year?
It wasn’t too long ago that companies had to reapply for PSA agreements every single year. Until the tax year 2019/20, it was common practice. Thankfully HMRC has reformed the way that PSA agreements work and allow them to continue in an “enduring agreement”.
This means both less work for businesses and HMRC. So it’s a win/win for everyone really!
The only reasons that businesses need to contact HMRC about their PSA agreements are either:
You want to amend, change or alter the PSA agreement
You want to cancel the PSA agreement
Keeping HMRC compliant
Successful payroll, taxes and expenses are all about keeping HMRC compliant. But if you aren’t regularly reviewing your PSA agreement, there could be trouble.
By following the same system as previous years you could open yourself up to unexpected exposure or overpayment of taxes and national insurance contributions!
That’s where we come in.
Maybe it’s our cutting edge, AI supported bookkeeping software that makes payroll a breeze. Perhaps it’s our dedicated team of accountancy experts on hand to help you. Between the two of them, we keep businesses on the financial straight and narrow.
More than that, our accountancy services specialise in startups and unlocking cash flow that you never knew existed. With our help you won’t simply maintain good financial hygiene, you’ll unlock explosive growth for your business.
So contact an accountancy expert today and learn more about the support available for your business. Remember to check out the School of Startups; our completely free database of guides, videos and podcasts made by industry leading professionals. CEOs, CFOs and Directors share the struggles and secrets that drove them to their success today!