Staff gifts. Team meals. Corporate hospitality. A shared team taxi ride home after an event.

These are all fairly normal things for businesses to provide from time to time, but they can raise questions around how they should be reported to HMRC.

Most employers think about payroll or P11Ds, but there is another option that many businesses simply aren’t aware of.

It’s called a PAYE Settlement Agreement, or PSA, and it can provide a practical way of dealing with certain one-off benefits and expenses.

What is a PAYE Settlement Agreement?

A PAYE Settlement Agreement is an agreement with HMRC that allows your business to make one annual payment covering the tax and Class 1B National Insurance due on certain benefits and expenses.

This means employees do not have to personally pay the tax on those items, and the benefits included within the agreement do not need to be reported through the normal P11D process.

Why might a business use a PSA?

A PSA can help:

Simplify reporting for one-off benefits
Reduce administration for both employers and employees
Avoid employees receiving unexpected tax charges
Deal with benefits that would otherwise be difficult to allocate accurately

What types of benefits can be included?

HMRC generally allows items that are minor, irregular or impracticable to deal with through normal payroll procedures. Here are a few examples that may help you decide whether a PSA could be relevant for your business.

Minor benefits

These are small items that HMRC may accept within a PSA. There is no fixed monetary limit, and common examples include:

Gifts for significant life events, such as a marriage, new baby or house move
Long-service awards which don’t meet the tax exemption within Income Tax (Earnings and Pensions) Act 2003
Certain telephone bills

Irregular benefits

These are provided occasionally rather than as part of a regular arrangement, such as:

Relocation expenses above the usual exemption limits at Income Tax (Earnings & Pensions) Act (ITEPA) 2003
Use of an employer’s holiday home

Impracticable benefits

Some benefits would create a disproportionate amount of administration or record keeping. In these situations, HMRC may allow them to be included within a PSA. HMRC’s guidance explains this in more detail.

Examples include:

Attendance at a corporate hospitality box
Shared meals
Taxi journeys

How do you apply for a PSA?

The easiest way to apply for a PSA is through your Government Gateway account, although applications can still be made by post if needed.

If you’d prefer some support, an agent can also apply on your behalf. HMRC explains both routes here.

How is the amount calculated?

Once a PSA is in place, you’ll need to tell HMRC what is owed for each tax year. This is done using the PSA1 process.

HMRC will need information including:

The value of the items on which tax and Class 1B National Insurance are chargeable
The total number of employees receiving each benefit or expense
The number of employees chargeable at each tax rate
The calculation of the tax and Class 1B National Insurance due

As part of the calculation, the business also pays Class 1B National Insurance. The rate applied depends on the relevant tax year.

The tax rate used for employees could include:

The basic rate
Both the basic rate and higher rate
The basic rate, higher rate and additional rate
Any Scottish rate that applies
Any Welsh rate that applies

One point that often catches businesses out is that employees who don’t normally pay Income Tax still need to be included at their first applicable tax rate. This means there can still be tax to pay, even if the employee’s earnings are within their Personal Allowance. HMRC has published a useful guide with working examples

Key dates to remember

🗓️ 5 July: The deadline to apply for a PSA is 5 July following the end of the first tax year it will cover. For example, the deadline for the 2025/26 tax year is 5 July 2026.

🗓️ 19 & 22 October: Tax and National Insurance due under a PSA must be paid by 19 October if paying by post, or 22 October if paying electronically.

As with most HMRC deadlines, late payments may result in interest and penalties.

Can a PSA be changed later?

In short, yes. Once HMRC approves a PSA, it will usually continue from year to year unless you decide to change or cancel it.

Existing agreements can be amended or cancelled if circumstances change.

Is a PSA right for your business?

Every situation is different. Whether a PAYE Settlement Agreement is suitable will depend on the type of benefits you provide and how often they arise.

If you’ve looked through these examples and found yourself thinking, “We’ve done some of those,” don’t panic. This is an area many businesses simply aren’t familiar with.

If you’re unsure how certain expenses or benefits should be treated, Melissa and our Payroll team are always happy to help.

Helpful links

Here are some useful resources if you would like to explore PAYE Settlement Agreements in more detail:

How We Support Employers

Keeping on top of employee benefits, payroll reporting and HMRC deadlines can be difficult, especially when certain expenses don’t fit neatly into the usual payroll or P11D process.

At The Arkk Alliance, our Payroll team works with employers from our offices in Leamington Spa, supporting businesses across Warwickshire and the wider UK.

We help employers by:

Reviewing staff benefits and expenses to identify possible PSA items
Supporting PAYE Settlement Agreement applications
Helping calculate tax and Class 1B National Insurance due under a PSA
Preparing and submitting relevant information to HMRC
Keeping employers aware of key PSA, P11D and payroll deadlines
Reducing the administrative burden on internal teams

Whether you need help understanding if a PSA is right for your business, or you’d like support with the process from start to finish, Melissa and our Payroll team are here to help make things clearer and more manageable – just get in touch with us.

Can Employers Pay the Tax on Staff Benefits? A Guide to PAYE Settlement Agreements