PSA – PAYE Settlement Agreements
In this week’s blog, we will be exploring what your employer does on your behalf, behind the scenes. In certain situations, not only do they pay a significant National Insurance contribution (for more information click here) for you, but will pay the entirety of the tax bill. We bet you didn’t know that.
So, what is a PSA?
A PSA, or PAYE Settlement Agreement, allows the employer to settle the employee’s tax bill on minor or irregular benefits. A common example of a benefit covered by this would be a staff party. If an employer provides a party for their employees, provided the cost is less than £150 per head, this benefit is exempt. However, if it exceeds this threshold, the employee is liable to be taxed on the whole cost. Generally, as a gesture of goodwill, the employer will meet any tax liabilities arising, by negotiating a tax settlement with HMRC (Note that the example of a party is a special case with the £150 threshold).
What is/isn’t covered?
The HMRC website provides a flowchart to help you work out what is and isn’t covered under a PSA, but eligible expenses and benefits must fall into three groups;
- Minor items, such as a small present for an employee in hospital.
- Irregular items, for example occasional use of a company holiday flat.
- Items that are impracticable to operate PAYE on, such as shared benefits, i.e. shared car or taxi journeys that are difficult to attribute to individual employees.
The definitions of the words minor, irregular and impracticable are not fixed, so judgement must be used to determine what is covered. Some examples to guide you can be found here.
Items that can’t be covered include, but are not limited to, cash payments, such as salary, wages, bonuses etc., large benefits for example a company car, and round-sum allowances (a lump sum provided to cover all expenses for the year). Any items that have already had tax deducted through PAYE, and items such as business-related expenses that don’t attract any tax or NIC are also not covered.
How to calculate what needs to be paid.
If you are an employer, you may be wondering “exactly how much do I need to pay?” Below is an example of how to work it out.
Case 1: You host a Christmas dinner party for your employees. The total number of employees is 200, of which 100 pay the standard rate of income tax, 50 at higher rate income tax, and the remaining 50 at additional rate income tax (i.e they are 50% tax payers earning over £150k p/a). The bill for the event comes to £50,000, which is £250 per employee (which is above the £150 per head threshold as stated above). The detailed calculation can be found here, but the total value of the PSA is £37,720.83, meaning that the party, which costs £250 per person, costs the employer a massive £87,720.83. Of course, this is a very simplified case, with just one taxable benefit. Normally, the PSA encompasses a lot more items.
In case you were hoping to minimise the bill by only inviting the employees who pay basic rate, in order to be exempt, as well as costing below the £150/head threshold, the event must be open to all. Whether they attend or not is a different matter!
The Killer
Not only does the employer have to pay National Insurance on the cost of the party (per person) but also on the tax paid on behalf of that person. What’s worse, the higher tax band you are in, the more your employer pays in NI and tax for your party. So the next time you are invited to that office party, remember to thank your boss for paying your tax, I’m sure he’ll appreciate the reminder!