Now that the economy is recovering, companies are naturally looking to reward their staff for getting through these tough times, but they need to be aware of their tax liabilities.
Whether you want to award cash bonuses or spa weekends, these must be recorded with HMRC as tax will be due. To make things easier for businesses, all employee benefits that cannot be directly attributable to certain individuals (e.g. corporate team building day) can be covered by a one-off PAYE Settlement Agreement (PSA).
Read on to discover how PSAs work in practice…
What is a PAYE Settlement Agreement?
Think of a PSA as a tool that allows a business to make a single annual payment to HMRC to cover any tax or National Insurance contributions due on employee benefits which are classed as minor, irregular or impracticable. The company then suffers the tax liability of providing these benefits rather than the employee.
What are minor benefits and expenses?
As the name suggests, minor benefits are considered the least expensive. They typically include the following:
- Incentive awards, such as employee of the month
- Telephone bills
- Small gifts and vouchers
- Staff entertainment, such as a concert ticket
- Non-business expenses while staying overnight on business (over the daily limit)
What are irregular benefits and expenses?
Any benefits and expenses that are not paid regularly during a tax year, or are not mentioned in their contract, are considered irregular. Examples can include:
- Property relocation expenses above £8,000 (tax-free below £8,000)
- Travel costs to overseas events
- Paying for a spouse to travel with an employee abroad
- Staying at company-owned accommodation.
What are impracticable benefits and expenses?
The final category covers any expenses and benefits that are more difficult to put a value on, or to calculate for individual employees. Typical examples include:
- Any staff entertainment which is not exempt from tax or National Insurance contributions
- Shared/pool cars
- Personal care expenses, such as hairdressing.
What cannot be included in a PAYE Settlement Agreement?
Businesses cannot add wages or high-value benefits to their PSA, including company cars, cash bonuses, round sum allowances or financial loans.
How do I apply for a PAYE Settlement Agreement?
You need to contact HMRC outlining the expenses and benefits you want your PSA to include. The deadline for PSA applications is July 5 after the first applicable tax year.
If agreed, HMRC will send you two draft copies of form P626 — both must be signed and returned. HMRC will authorise your request and send back a form — this is your PSA.
You’ll need to report anything that cannot be included separately, by using form P11D. To find out more about P11D forms read our guide here.
Form PSA1 can be used to calculate the total tax and Class 1B National Insurance you need to pay.
Completed forms must be sent to HMRC as soon as the tax years ends, and you will be informed before October 19 of the exact amount of tax and National Insurance due. Payments must be made by October 22, otherwise, you will be fined or charged interest.
The good news is that UHY Hacker Young can handle this whole process for you.
What are trivial benefits?
HMRC realises that it is not practical to collect tax on smaller items, so it allows trivial benefits to be given by a business to their employees. These trivial benefits will be tax free if they are:
- Not cash or a cash voucher
- Not a reward for work or performance
- Not in the terms of their contract
- Cost £50 or less per employee
There are no limits on the number of trivial benefits made in each tax year, but for directors in a close company the total value cannot exceed £300 annually.