Introduction to this document

PAYE settlement agreement letter

A PAYE settlement agreement (PSA) can be used where you want to meet the PAYE tax and Class 1A NI liability in respect of small or irregular taxable benefits you provide to your employees. Typically, you are most likely to use a PSA where it would be inappropriate for you to expect your employees to pay the tax due on the benefit. For example, where you make a gift to them.

To maintain goodwill

Where you make a minor or irregular gift to an employee that gives rise to a tax or NI liability, you can use a PAYE settlement agreement (PSA) to pay any liability on behalf of the employee. The use of a PSA involves grossing up the payment for tax and NI so the value received by the employee represents the net value after deductions.

HMRC doesn’t provide a standard application form, so to set up a PSA you need to write to your local inspector using the PAYE Settlement Agreement Letter, describing which gifts you want to include (note that for 2018/19 you won’t need to obtain prior agreement from HMRC for a PSA).

The tax due must be paid by 19 October following the year to which the PSA relates. A PSA has to be renewed on an annual basis, but this is usually a formality.