A lot of employers provide rewards to their staff, but these payments quite often come with a sting in the tail. This is because, any gifts or benefits that are provided as part of their employment, will incur a PAYE Income Tax and a National Insurance (NI) liability. Any tax and NI due must be reported to HMRC via a P11D form, who will collect tax and NI due, usually by way of your tax code.
Most employers who give rewards, believe the income tax and NI liability should not be imposed on their employees, especially as most of these rewards are for recognition of service or a special one-off occasion. This has given rise to Pay As You Earn settlement agreements or PSAs.
PSAs allow employers to cover the tax and NI liability on behalf of their employee. They make one annual payment to cover all the liabilities on minor, irregular or impracticable benefits. They do this by adding the value of the rewards onto a PSA, without the necessity to complete P11D for individual employees.
What benefits should be included?
HMRC’s payroll bible (their instruction manual), refers to “minor, irregular or impracticable” rewards or benefits, but what exactly are they?
- Minor – Expenses or benefits that don’t have monetary limits to define the valuation of ‘minor’. Examples would be gifts for significant events, such as marriage, a new child, anniversaries, moving house and long-service awards that don’t qualify for tax exemption under the 2003 Pension Act.
- Irregular – Expenses or benefits. these are, as the name implies, paid at irregular intervals. This means they would be difficult for an employer to keep track of and report on.
- Impracticable – Expenses and benefits that would be impractical to calculate the value of. HMRC’s guidance states: “Employers must demonstrate that they cannot follow normal procedures without a disproportionate amount of effort or record keeping.” Examples include attendance to a corporate hospitality box or shared meals or taxis.
The PSA
To obtain a PSA from HMRC, the employer can apply directly to HMRC or their accountant can do so on their behalf. You can apply for a PSA by post, but as it’s a relatively simple procedure, I would suggest doing it done on-line at; https://www.gov.uk/paye-settlement-agreements/how-to-get-a-psa
Assuming that you’ve completed the application correctly, approval will follow in around 6 to 8 weeks and you’ll be sent a PSA1 form or an online link to complete.
Completion & calculation
On the PSA1 form, you’ll need to provide details of:
- The value of the items on which tax and National Insurance is chargeable
- The total number of employees in receipt of each specified amount
- The number of those employees chargeable to each specified rate of tax
- A computation of the tax and Class 1B NICs due
Note 1: The National Insurance (Class 1B) rate for 2024 to 2025 is 13.8%.
Note 2: Any individual who doesn’t pay tax, such as someone working part-time, will still need to be included as paying the first chargeable rate of tax. Therefore, the employer will end up paying income tax on this person’s reward, even if they are paid under the personal allowance.
Note 3: If you need to change or cancel an approved PSA, you can do so online or by post.
Other information
You can apply for a PSA at any point before 6th July following the end of the tax year in which you wish to report the rewards provided to employees. Once you have applied for a PSA and it’s been approved, you will not need to renew the PSA each year if the items you wish to cover haven’t changed.
Payments of any tax and NI to HMRC, must be made no later than 22nd October of the tax year following the year the PSA applies to. You may, of course, pay earlier than this date if you so wish. If you don’t pay, or pay your owed liabilities after the above dates, you may be fined or charged interest.
Accountant’s view
At our practice, we regularly reward staff for a variety of reasons, such as getting married, exceptional performance or passing accountancy exams and I can assure you that the PSA procedures are very simple to navigate. HMRC has even published a useful guide with working examples; so, if you need help, go to:
https://www.gov.uk/government/publications/gfc1-2022-guidelines-for-compliance-help-with-paye-settlement-agreement-calculations/gfc1-2022-help-with-paye-settlement-agreements-psa
