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The PSA: everything you need to know
Lisa Sheldon ChMCIPPdip, CIPP Payroll Advisory Officer, provides an overview of everything you need to know regarding pay as you earn settlement agreements (PSAs), ahead of the payment deadline this October
I t’s that time of year again – the payroll tax year-end is complete, the P11D(b) has been filed and now the PSA1 tax return must be processed. A PSA is a statutory arrangement which allows employers to pay the income tax liability and Class 1B National Insurance contributions (NICs) on behalf of their employees. This relieves employees from any personal liability on the non-cash taxable benefits and expenses covered under the agreement. Since its introduction in 1996, the PSA has become an increasingly popular method for employers to settle employees’ income tax liabilities for certain benefits and expenses. These items would otherwise be reportable via a P11D or payrolled. Under the Income Tax (Earnings and Pensions) Act (ITEPA) 2003 Part 11 1 and the Income Tax (Pay As You Earn) Regulations 2003, Regulation 105 2 , the employer agrees to become liable for the tax due on amounts which would otherwise be chargeable to the employee. Additionally, the Social Security Contributions and Benefits Act 1992, Section 10A 3 states that Class 1B NICs are payable by the employer on items included in a PSA. Reviewing your P626 agreement It’s essential to review your current P626 agreement to ensure it reflects your organisation’s current requirements. If no longer needed, it can be cancelled. But make sure all deadlines 4 and payment
guidelines from HM Revenue and Customs (HMRC) are followed. The employer will need to clearly specify which benefits are to be included and PSA1050 5 offers further guidance. “Since its introduction in 1996, the pay as you earn settlement agreement has become an increasingly popular method for employers to settle employees’ income tax liabilities for certain benefits and expenses” Devolved taxation considerations Establishing the tax rates for the PSA can be an administrative burden for employers. The situation is more complex when an employee’s main residence is spread across the UK. This is because income tax has been partially devolved to Scotland (since April 2016) and to Wales (since April 2019). Employees should be allocated according to the marginal tax rates applicable in their country of residence. This means tracking benefits in kind (BiKs) by jurisdiction
throughout the year. Employees whose tax code changes mid-year (e.g., from Scottish to English) should be identified when finalising the PSA1. There’s further guidance on the PSA1160 6 overview. All amounts included in a PSA must be calculated on the grossed- up value, including value added tax (VAT), even if input VAT has already been reclaimed by the employer. Calculation examples can be found at PSA1170 7 under Regulation 108 of the PAYE regulations. The Class 1B NICs rate you will be using to report your 2024/25 PSA this October (2025) is 13.8%. The rate for tax year 2025/26 will be 15%. PSA process and timelines The P626 agreement is enduring and remains valid until amended or cancelled by the employer or HMRC. Employers must apply for a PSA before 6 July following the end of the relevant tax year to cover benefits provided during that year. Benefits of a PSA A PSA allows employers to: l settle tax and NICs on certain benefits and expenses l reduce record-keeping and administrative burden l use a practical and flexible method to handle minor or irregular benefits. Applications for a PSA can be submitted by post or online. Once HMRC agrees, it will send two draft copies of the P626
| Professional in Payroll, Pensions and Reward | October 2025 | Issue 114 58
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