A PAYE Settlement Agreement (PSA) lets an employer pay, in one annual sum, the income tax and National Insurance on minor, irregular or impracticable expenses and benefits, so the items stay off payroll and off forms P11D. The employer pays the tax on a grossed up basis plus Class 1B National Insurance, which is 15% for 2026 to 2027. The agreement must be in place by 5 July after the first tax year it covers, and the money is due by 22 October (19 October by post).

What is a PSA and where does the law come from?

A PSA is a statutory arrangement between an employer and HMRC. The framework is in Chapter 5 of Part 11 of the Income Tax (Earnings and Pensions) Act 2003 (sections 703 to 707), with the detailed rules in the Income Tax (Pay As You Earn) Regulations 2003. The employer becomes liable for the tax and National Insurance on the items covered, and the employees are relieved of liability on them, so the items do not appear in their tax codes or Self Assessment returns.

The National Insurance side comes from section 10A of the Social Security Contributions and Benefits Act 1992, which creates Class 1B contributions. Class 1B replaces any Class 1 or Class 1A liability on the items in the agreement, is paid only by the employer and gives employees no benefit entitlement.

A PSA is voluntary. HMRC’s Guidelines for Compliance GfC1 say that where a benefit can reasonably be attributed to an individual, the employer should normally report it through payroll, payrolling benefits or form P11D instead.

What can go in a PSA?

Items must be minor, irregular or impracticable. HMRC deliberately does not define these terms and sets no monetary limit for “minor”, but its PAYE Settlement Agreements manual gives examples:

  • Minor (PSA1060): incentive awards, small gifts and vouchers, a ticket to a sporting or social event, telephone bills, gym subscriptions, personal incidental expenses above the statutory daily limit.
  • Irregular (PSA1070): relocation costs above the £8,000 exempt amount, occasional attendance at an overseas conference, a spouse occasionally accompanying an employee abroad, occasional use of a company holiday flat.
  • Impracticable (PSA1080): staff entertainment that is not already exempt, shared cars, shared taxis home, hairdressing or chiropody provided on site. The employer must show normal procedures would need a disproportionate amount of effort; inconvenience is not enough.

Items that qualify as trivial benefits are already exempt and should not be included.

What cannot go in a PSA?

GOV.UK and GfC1 rule out:

  • wages and other cash payments, including bonuses and round sum allowances;
  • large benefits provided regularly, such as company cars, car fuel and beneficial loans;
  • shares and payments into funded unapproved retirement benefit schemes;
  • items already taxed under PAYE or already reflected in the employee’s tax code for that year.

Section 10A(5) adds a timing point for National Insurance: if the agreement is made after the start of the tax year and Class 1 contributions were already due on an item before then, that item is not treated as included for Class 1B. GfC1 explains that Class 1B can only replace a Class 1 or Class 1A liability that has not yet fallen due for payment.

How is the grossed up tax calculated?

Because the employer is paying tax the employee would otherwise owe, the payment is itself a further benefit. GfC1 sets out the grossing up method for each group of employees paying tax at the same rate:

  1. Value of items for that group multiplied by the appropriate tax rate gives answer A.
  2. Answer A multiplied by 100 and divided by (100 minus the tax rate) gives the grossed up tax.

The calculation is repeated for each rate band, including Scottish and Welsh rates where they differ, and the results are added together. Employees who pay no tax because their earnings are below the Personal Allowance are included at their first chargeable rate: basic rate in England, Wales and Northern Ireland, starter rate in Scotland. Where it is impracticable to identify which employees received a shared item, the tax can be calculated using a representative sample of the employees concerned. The cost must include all associated costs and the full VAT, whether or not the employer can reclaim it.

How is Class 1B National Insurance calculated?

Under section 10A(2) and (3), Class 1B is charged at the Class 1B percentage on the total of:

  • the value of items in the agreement that would otherwise attract Class 1 or Class 1A contributions; and
  • the total grossed up tax payable under the agreement.

Section 10A(6) sets the Class 1B percentage equal to the secondary Class 1 percentage for the year, which is 15% for 2026 to 2027. Items that are taxable but exempt from National Insurance stay in the tax calculation but are left out of the Class 1B base. Class 1B is still due on the tax itself even if no item in the agreement would have attracted National Insurance.

Illustration only. An English employer gives £100 of shopping vouchers to 30 basic rate and 10 higher rate employees in 2026 to 2027.

Step Basic rate group Higher rate group
Value of items £3,000 £1,000
Tax at 20% or 40% £600 £400
Grossed up tax £600 x 100 / 80 = £750 £400 x 100 / 60 = £666.67

Total tax is £1,416.67. Class 1B is 15% of (£4,000 + £1,416.67), which is £812.50. The employer pays £2,229.17 in total.

What are the deadlines?

Step Deadline Example for 2026 to 2027
Agree the PSA (form P626 or online) Before 6 July after the end of the first tax year it covers 5 July 2027
Send the calculation (form PSA1, including nil returns) 31 July after the tax year 31 July 2027
Pay tax and Class 1B 22 October electronically, 19 October by post 22 October 2027

A PSA is enduring: it continues each year until the employer or HMRC cancels or changes it, so it does not need renewing. The employer must still tell HMRC the value of the items every year, even if the value is nil; if it does not, HMRC will calculate the amount and the employer will be charged more. Under regulation 115 of the PAYE Regulations, interest runs automatically on anything paid after the final due date, and HMRC asks for payment by the due date even if it has not yet issued a payslip. Records supporting the calculation must be kept for at least 3 years after the end of the latest tax year they relate to.

What goes wrong with PSAs?

  • Including cash bonuses, round sum allowances or regular high value benefits, which can never be covered.
  • Grossing up everything at 20% when some recipients are higher rate, additional rate or Scottish taxpayers.
  • Leaving the VAT out of the cost of the benefit.
  • Forgetting the nil return, or paying without sending a calculation so HMRC cannot match the payment.
  • Assuming items not listed in the P626 are covered. Omitted items found after 5 July generally have to go on amended P11D forms instead.

PSA errors often come to light in an HMRC employer compliance check, where officers can ask to inspect PSA records under regulation 117. For staff events and gifts more generally, see our guide to business entertainment and gifts.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.