PAYE Settlement Agreement (PSA)

A PAYE Settlement Agreement (PSA) is a voluntary contract between an employer and HMRC under which the employer agrees to settle the income tax and Class 1B NIC on certain benefits and expenses on the employee's behalf — meaning the employee receives the benefit completely tax-free.

PSAs only cover items that are minor (e.g. a £30 long-service token), irregular (e.g. one-off relocation costs above the £8,000 statutory exemption), or impracticable to attribute to individuals (e.g. shared staff parties). They cannot be used for major benefits like company cars or routine bonuses, which must go through payroll or P11D in the normal way.

The employer must apply for a PSA before 6 July following the end of the tax year and pay the calculated tax and Class 1B NIC by 22 October (electronically) or 19 October (cheque). Class 1B NIC is at the same rate as employer's Class 1A NIC (15% for 2026/27) and is charged on the gross-grossed-up value of the benefits — i.e. the cash benefit plus the income tax the employer is paying on the employee's behalf.

Worked example: A consultancy holds a £20,000 summer party for staff, exceeding the £150-per-head annual-event exemption. With a PSA in place, the employer grosses up the £20,000 to its pre-tax equivalent (£33,333 at the 40% rate, say) and pays tax of £13,333 plus Class 1B NIC of £5,000. Each attending employee receives the party as a tax-free benefit and never sees the cost on a payslip or P11D.