What is a PAYE Settlement Agreement and when should you use one?

A pay as you earn Settlement Agreement (PSA) is an agreement between an employer and HMRC that allows the employer to pay the tax and Class 1B National Insurance due on certain taxable benefits and expenses provided to employees. The arrangement is voluntary and applies to benefits and expenses that are minor, irregular or impracticable to deal with through normal PAYE processes.

A PSA can be useful for items such as staff entertaining and social events, certain gifts and vouchers, or benefits provided during away days and team events. Rather than requiring the employee to meet the tax liability themselves, the employer settles it with HMRC, which can simplify the administration of occasional benefits.

A PSA moves responsibility for the tax liability from the employee to the employer for qualifying benefits and expenses. Employers still need to identify the relevant benefits, keep records and calculate the amount due accurately.

You need to apply for a PSA with HMRC by 5 July following the first tax year it covers. If you're setting one up for the first time, check HMRC’s guide on how to apply. Employers with an existing agreement should check that it still covers the benefits and expenses that they intend to include.

Changes requested by the 5 July deadline should be straightforward, provided the items are eligible. HMRC treats changes made later as a matter of discretion. To change or cancel a PSA, apply online or write to the office that issued it. If you cancel, HMRC cancels it from the date you request, and any outstanding tax and National Insurance is due by 22 October (19 October by post).

HMRC ran a call for evidence on PSAs between 23 June and 15 September 2026. At the time of writing, HMRC had not published an outcome.

Not every taxable benefit or expense can be included in a PSA. The three main categories are minor, irregular and impracticable benefits and expenses, each covering different circumstances.

Minor benefits and expenses

Minor benefits and expenses are relatively small taxable items that can be awkward to deal with individually through payroll. Examples can include small gifts and vouchers, certain incentive awards, telephone bills, and some staff entertainment.

An item being small doesn’t automatically make it suitable for a PSA. Employers should first check whether a specific tax exemption applies, as qualifying trivial benefits don’t need to be included in a PSA.

Irregular expenses and benefits

Irregular benefits and expenses aren’t provided at regular intervals and generally aren’t something that an employee has a contractual entitlement to receive. Examples can include relocation expenses above the £8,000 exemption limit, the costs of an occasional overseas conference where not all expenses qualify for relief, and the expenses of a spouse who occasionally accompanies an employee abroad.

This category can be useful where an employer provides a taxable benefit occasionally rather than as part of an employee’s normal package. Employers should still check the circumstances and any available exemptions before assuming that an item qualifies.

Impracticable benefits and expenses

Impracticable benefits are those where it’s difficult to put an accurate value on the benefit or divide its value between individual employees. Shared benefits and certain staff entertainment can fall into this category, where it isn’t practical to attribute the benefit to each person.

This doesn’t mean that employers can use a PSA whenever calculating a benefit is inconvenient. The rules are intended for circumstances where applying PAYE or allocating the benefit between employees isn’t practical.

What can’t you include in a PSA?

Some payments and benefits fall outside the scope of a PSA because they should be dealt with through other PAYE or benefits reporting processes. Examples include:

• Wages and other ordinary earnings
• Cash bonuses and round-sum allowances
• High-value benefits such as company cars
• Beneficial loans
• Certain regular benefits provided to individual employees
• Benefits where tax has already been deducted through PAYE
• Shares and other items with more complex tax treatment

Because the employer is settling the employees tax liability, a PAYE Settlement Agreement calculation needs to account for the additional tax created by the employer paying that liability. It’s therefore important to work it out accurately by following the steps below.

Gather the information you need

Start by bringing together the records needed for the calculation, including the value of each benefit or expense, how many employees received it, and the appropriate tax rate. This information makes the calculation more accurate where benefits can be attributed to individuals.

You should also consider whether employees are subject to different Income Tax rates, including differences between England, Wales and Scotland. Consistent, reliable records throughout the year make this easier than reconstructing benefits and expenses after the tax year has ended.

Work out the grossed-up tax

The tax isn’t simply the original benefit value multiplied by the employee’s tax rate. Because the employer is paying the employee’s tax liability, that payment is treated as an additional benefit. The calculation therefore needs to account for the tax due on the original benefit and the tax paid on the employee’s behalf, a process known as grossing up.

For example, if an employee receives a taxable benefit worth £100 and pays tax at 20%, the grossed-up amount would be £125. The calculation works in four steps:

• Start with the benefit value: £100
• Subtract the tax rate from 100%: 100% − 20% = 80%
• Gross up the benefit: £100 ÷ 80% = £125
• Calculate the tax due: 20% of £125 = £25

The employer therefore needs to account for £25 of tax on the £100 benefit.

Calculate Class 1B National Insurance

Employers also need to account for National Insurance when calculating a PSA. Class 1B National Insurance is payable by the employer on the grossed-up value of the items included in the agreement.

For the 2026/27 tax year, the Class 1B rate is 15%. This should form part of the employer’s overall PSA cost.

Once you’ve identified the relevant benefits and completed the calculations, there are several stages to completing the PSA process. The individual steps are set out below.

Review what your PSA covers

Check that the benefits and expenses you've identified actually fall within the categories agreed with HMRC. If an item doesn’t qualify or isn’t covered by the agreement, establish whether it needs to be dealt with through PAYE or another reporting method instead.

Finalise your calculation

Use your records to complete the PAYE Settlement Agreement calculation, checking the benefit values, number of employees, and relevant tax rates. HMRC recommends submitting the calculation by 31 July following the end of the tax year. This is a recommendation rather than a statutory filing date, but if HMRC doesn’t receive a calculation, it can estimate the liability itself and may revoke the agreement.

Submit your figures to HMRC

Your PAYE Settlement Agreement submission should give HMRC the information it needs to establish your tax and National Insurance liability. HMRC’s online PSA1 form asks for the value of each benefit or expense, the number of employees receiving it, and the applicable tax rates. You can also post your own calculation.

Pay what you owe by the deadline

Payment is due by 22 October following the end of the tax year when paying electronically, or 19 October when paying by post. Don’t confuse this with the 5 July deadline for applying for a PAYE Settlement Agreement. Late payment attracts interest from the day after the due date, and a 5% penalty can apply if the amount is still unpaid 30 days later, so make sure to build PSA calculation and payment into your year-end timetable.

A PSA isn’t mandatory, and it isn't necessarily the most appropriate way to deal with every taxable benefit or expense. Before entering into one, consider what you provide, how often you provide it, and whether another reporting or exemption route would be more appropriate.

Potential value of a PSA

Consider the range of employee benefits and expenses your business provides, and whether many are minor, irregular or difficult to attribute. A PSA can be useful where employees would otherwise face tax on occasional benefits, or where calculating the liability for individual employees would create unnecessary admin. If most benefits can be attributed to individual employees and dealt with efficiently through payroll, a PSA might not be suitable.

Cost to your business

The employer takes on the employee’s Income Tax liability as well as the applicable Class 1B National Insurance. This means that the cost of a benefit to the business isn’t simply the value of the original benefit. Before proceeding, calculate the total liability and consider whether the administrative convenience of a PSA justifies the additional cost to you.

Impact on payroll operations

A PSA can simplify some aspects of payroll by allowing qualifying one-off benefits to be dealt with separately from normal PAYE processing and FPS and EPS payroll reporting, but it creates an additional annual process. This can become more complex where businesses operate across multiple payrolls, have international employees, or provide benefits through several systems.

Accurate record-keeping

Employers need to retain records of the benefits and expenses included in their PAYE Settlement Agreement submission, the calculations used, and the payments made to HMRC. Bringing this information together at the end of the year can be difficult if benefits and expenses have been recorded inconsistently. Payroll software can help to keep this information organised, while payroll reports can make it easier to identify relevant figures.

H3: Alternatives to using a PSA

A PSA is only one way to deal with taxable benefits and expenses. Depending on the benefit and circumstances, employers may use PAYE and RTI reporting, P11Ds (while relevant reporting requirements remain in place), or an exemption such as HMRC’s trivial benefits exemption.

Payrolling benefits in kind is also becoming increasingly important, with mandatory payrolling starting in phases from 6 April 2027. Phase 1 covers company cars, car fuel, vans, van fuel and employer-provided medical benefits. Taxed award schemes (TAS) are another, more specific arrangement for certain awards. However, they aren’t a general replacement for a PSA, and have their own conditions and administrative requirements.

A PSA can make it easier to manage certain taxable benefits and expenses, but employers still need to identify qualifying items, keep accurate records, calculate the tax and Class 1B National Insurance correctly, and meet the relevant deadlines.

PeopleHR provides flexible payroll solutions that can help to keep employee and payroll information organised, reduce manual admin tasks, and make it easier to access the records and reports needed to support wider payroll processes. While software doesn’t replace an employer’s responsibility to apply the rules correctly, reliable payroll data can make preparing for a pay as you earn Settlement Agreement and managing the associated PAYE Settlement Agreement submission more straightforward.

See how our payroll solutions work with a 4-minute demo or get in touch with our team to find out more.