A PAYE Settlement Agreement (PSA) can be a very effective way to give a benefit to an employee without the employee having to pay tax and national insurance on that benefit.
Instead, the employer shoulders the cost.
This can also be a very efficient way to reduce the administration involved in producing P11Ds, which is where the tax and NICs on the benefit would normally be declared.
So, given the convenience of the PSA, what benefits can be included? And how is the tax and national insurance calculated?
Before rushing down the PSA route, there are other options available to the employer to consider, and these, if the benefit qualifies, would mean that the income tax and national insurance costs are no longer relevant or payable. The other options are:
• Qualifying business expenses, and
• Trivial benefit
Qualifying business expenses
These are costs incurred ‘wholly and exclusively’ in the course of the business, and as such can include genuine work-related expenses such as business travel and subsistence.
The statutory exemption for certain types of benefits costing £50 or less.
All of the following must apply
• it cost you £50 or less to provide
• it isn’t cash or a cash voucher
• it isn’t a reward for their work or performance
• it isn’t in the terms of their contract
To qualify for inclusion in a PSA it must be for items that are ‘minor, irregular or impractical’ to allocate to individual employees and that cannot be included in either of the above categories.
Examples of the above
Below are some examples of the above categories.
A group of employees are working late. The manager orders food and drink for them and, as the employees are working late into the night, a taxi to run them home. As neither of these costs can be allocated to each individual employee in a way that is logical or conducive to employer/employee relations, it is much more cost effective for the employer to pay the tax and national insurance on the amounts.
However, a gift of a bottle of wine, or a gift voucher, provided the cost is below £50, should be considered as a trivial benefit, not an item suitable for PSA.
And the cost of a Christmas tree and decorations for the shop front, along with the taxi fare to go and collect it would be considered a qualifying business expense.
Exceptions to a PSA
Items that cannot be included in a PSA are:
• Cash payments
• Benefits regularly given to an employee
• Items that have already had PAYE deducted
• Items included in an employee’s tax code
• Profits Employee Car Ownership Scheme payments
Now that the choices of classifications have been identified and the costs allocated, the tax and national insurance can be calculated.
Calculating the cost of a PSA
A PSA is calculated at an employee’s marginal rate of tax. For the tax year 2018-19 this means that the income tax due on Scottish tax payer benefits will be different to that of the rest of the UK. The differing rates are shown below.
So, if an employer, as a reward for all the employees’ hard work done this year buys the staff Christmas gifts worth £60 each, the amount of tax and national insurance due per gift would differ depending on the tax code of each employee.
Calculating the income tax due
An employee with a Scottish prefix, paying the intermediate rate of tax would incur tax of
£60 ÷ (100-21) x 21 = £15.95 (to the nearest penny)
An employee with a marginal tax rate of 45% would incur tax of
£60 ÷ (100-45) x 45 = £49.09 (to the nearest penny)
So, the income tax cost to the employer for both gifts would be £15.95 + £49.09 = £65.04
Calculating the national insurance contributions
The national insurance contributions (NICs) for each gift is calculated on the gross amount.
The Scottish tax payer’s gift cost in total the net amount plus the tax £60 + £15.95 = £75.95. It is this amount that would be used to calculate the employer and employee NICs as follows:
Employer’s NICs £75.95 x 13.8% = £10.48, employee’s NICs £75.95 x 12% = £9.11. Total cost to the employer would be £95.54 (gift of £60, tax of £15.95 and NICs of £10.48 and £9.11)
The cost for the non-Scottish (additional rate) tax payer would be £60 + £49.09 = £109.09 plus employer’s NICs of £15.05 and employee’s NICs of £2.18, giving a total cost of £126.32.
Total cost to the employer for both employee gifts: £221.86.
Used appropriately PAYE Settlement Agreements can be an efficient and effective way of rewarding staff for those one-off occasions. Just be aware of the tax status of employees when calculating the tax and NICs due.
Julie Hodgskin is a fellow member of AAT, runs a licensed accounting practice and is a technical materials author for CIPP.