PAYE settlement agreements (PSAs) are arrangements under which an employer can settle the income tax and National Insurance liabilities on benefits in kind and expenses payments provided to employees and officeholders.

Setting up a PSA avoids passing on an unexpected, and potentially demotivating, tax charge to employees. Where a PSA has been agreed with HMRC, this will obviate the need for any reporting on the individual’s P11D.

The items that can be included in the PSA must meet one of three criteria: minor, irregular or impracticable to apply PAYE or apportion between the employees receiving the benefit.

Although reporting will eventually go online, applications for a PSA are currently made in writing to HMRC. The Revenue will then issue a P626 contract, which states that the employer will pay the tax and National Insurance liability on agreed benefits.

BUT NOT TRAVEL COSTS FOR NON-EXECUTIVE DIRECTORS IN PUBLIC SECTOR

Until recently, HMRC allowed taxable travel expenses to be included in public sector PSAs in respect of normal commuting costs for Non-Executive Directors (NED). The Department of Business (BEIS) wrote to the bodies it oversees on 30 May 2019 instructing them that any payments for commuting made to non-executives and other officeholders, will now have to be paid through payroll, with tax and National Insurance deducted at source.

Note also that fees for NED roles in the public and private sectors are always required to be subject to tax and NI through the payroll, as this is income for the holding of an office so it cannot be invoiced and paid gross to the NED.