PSA Tax & NIC Calculator

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How PAYE Settlement Agreements Work

A PAYE Settlement Agreement (PSA) is a formal arrangement with HMRC that lets employers pay tax on behalf of their employees for certain minor, irregular, or impractical benefits. Instead of employees being taxed on these benefits through PAYE or self-assessment, the employer settles the entire liability in one annual payment.

The key feature of a PSA is grossing up: because the employer pays tax on behalf of the employee, the tax is calculated on the grossed-up equivalent. A basic rate employee receiving a £200 benefit has a grossed-up value of £250 (£200 ÷ 0.80), with £50 income tax due. Class 1B NIC is then charged at 13.8% on the combined grossed-up benefit and tax liability.

PSA Application and Payment

Employers must apply for a PSA before the start of the relevant tax year, or before providing the benefits. Once agreed, HMRC issues a formal PSA certificate. The annual calculation is submitted by 31 July following the tax year, with payment due by 19 October (22 October for electronic payment).

Frequently Asked Questions

What is a PAYE Settlement Agreement?

A PAYE Settlement Agreement (PSA) is a formal agreement between an employer and HMRC that allows the employer to pay the tax and National Insurance on certain expenses and benefits on behalf of employees. A PSA is particularly useful for irregular or minor benefits where the administrative cost of including them in payroll or P11D forms would be disproportionate, such as staff parties, long-service awards, or small gifts.

Which benefits can be included in a PSA?

Benefits that can be included in a PSA are those that are minor (e.g. small gifts), irregular (e.g. one-off payments), or impractical to operate PAYE on (e.g. shared benefits that cannot be attributed to individual employees). Examples include trivial benefits exceeding the £50 limit, staff entertainment above the £150 annual limit, relocation expenses above £8,000, and overseas travel allowances.

How is PSA tax calculated?

PSA tax is calculated using a grossing-up formula because the employer pays the tax on behalf of employees. The grossed-up amount is: benefit value ÷ (1 − employee's tax rate). The tax due is the grossed-up amount minus the original benefit value. Class 1B NIC (at 13.8%) is then charged on the sum of the grossed-up benefit value plus the income tax due.

When do I need to apply for a PSA?

You must apply to HMRC for a PSA before the start of the tax year to which it relates, or at least before the expenses and benefits are provided. Once agreed, the PSA applies for subsequent years unless either party cancels it. Payment of PSA tax and Class 1B NIC must be made by 19 October (22 October for electronic payment) following the tax year end.

PSA vs P11D — which is better?

A PSA is better than P11D for minor, irregular, or shared benefits where individual attribution is impractical. With a PSA, employees do not see these benefits on their tax return or P60. However, PSA tax costs more due to grossing up — the employer bears both the income tax and Class 1B NIC. P11D is better for regular, easily valued benefits where employees can absorb the tax cost via PAYE code adjustments.