Settling your 2025/25 PSA

Employers with a PAYE Settlement Agreement (PSA) in place for 2025/25 will need to calculate what they owe and pay the tax and Class 1B National Insurance to HMRC in October 2025. They must also send their calculation to HMRC ahead of the payment date.

Nature of PSA

A PSA is a statutory agreement with HMRC which allows an employer to settle the income tax that their employees would otherwise be liable to pay on the benefits in kind included in the agreement. As paying tax on an employees would otherwise be liable to pay on the benefits in kind included in the agreement. As paying tax on an employee’s behalf is itself a taxable benefit, the employer must pay tax on the grossed up value of those benefits, taking into account the employees’ marginal rates of tax. The employer must also pay Class 1A liability that would otherwise arise. Class 1B National Insurance is also due on the tax payable under the PSA.

A PSA is not suitable for all benefits in kind, and a client can only use it to meet the tax liability on benefits falling within one of the following categories:

• Minor benefits
• Benefits that are provided irregularly; or
  • Benefits which it is impracticable to divide between employees.

Cash payments and high-value benefits, such as company cars, cannot be included within a PSA.

The introduction of the trivial benefits exemption means that a PSA is not needed in respect of many minor benefits. However, a PSA may be useful for low-value benefits that fall outside the scope of the trivial benefits exemption and which are not otherwise exempt. Examples, where this might be the case include to meet the liability arising on the attendance at a Christmas party where the event falls outside the exemption for annual parties and functions or that arising where taxis are provided home and the exemption for late night taxis is not in point.

A PSA must be agreed with HMRC no later than 5 July following the end of the tax year to which it relates, so employers wishing to set up a new PSA for 2024/25 had to do so by 5 July 2025. Once set up, it will remain in place until it is amended or cancelled by HMRC or by the client. Consequently, clients may still have a PSA in place for 2024/25 even if it was not set up this year. It is prudent to check.

Calculating the tax and Class 1B National Insurance

Where a PSA is in place, the employer pays tax on the grossed up value of the benefits provided to employees and Class 1B National Insurance both on the benefits included within the PSA which would otherwise be liable to Class 1 or Class 1A National Insurance contributions and on the tax due under the PSA- tax paid on an employer’s responsibility to calculate the tax and Class 1B National Insurance due and to submit their calculation to HMRC.

When calculating the tax and Class 1B National Insurance liability. HMRC’s Guidelines for Compliance (Help with PAYE Settlement Agreement calculations- GfC1) is a useful resource (see www.gov.uk/government/publications/gfc1-2022-guidelines-for-compliance-help-with-paye-settlement-agreement-calculations).

The guidelines:

• Outline HMRC’S preferred method for submitting calculations for PSAs; and
  • Help employers to reduce the risk of error when calculating the amounts of income tax and Class 1B National Insurance contributions payable on benefits in kind and expenses accounted for within a PSA.

More detailed guidance on PSAs can be found in HMRC’S PAYE Settlement Agreements Manual, which should be used in conjunction with the guidelines.

The calculation of the tax due under the PSA reflects:

• The amount of any expenses payments and the value of benefits in kind included within the agreement;
  • The number of employees receiving the expenses or benefits concerned.
  • The rate of tax that should be used to gross up the tax due.
  • The value of expense payments and benefits in kind that would otherwise attract a Class 1 or Class 1A National Insurance liability.
  • The grossed up tax payable under the agreement.
  • The Class 1B National Insurance on the grossed up tax; and
  • The Class 1B National Insurance due on items that would otherwise by liable to Class 1 or Class 1A National Insurance.

The grossing up is necessary to take account of the fact that tax paid on an employee’s behalf is also a taxable benefit.

To perform the calculation correctly, it is important to know the marginal rate of tax for all employees who receive benefits which are dealt with by the PSA. The position is complicated where benefits are received by Scottish taxpayers as the relevant Scottish rate of income tax is used. Although the Welsh rates of income tax are used for Welsh taxpayers, these are the same as those applying to taxpayers in England and Northern Ireland.

If benefits included within the PSA are provided to non-taxpayers, HMRC instruct for the purposes of the grossing up calculation that they are treated as being liable at the lowest rate of tax that would otherwise apply to them, i.e. the basic rate of tax where the taxpayer is resident in England, Wales, or Northern Ireland or the starter rate where the taxpayer is resident in Scotland, even though the employee would not be liable to pay tax on the benefit in the absence of the PSA.

For each rate of tax, the grossed up tax is found by working out tax at the appropriate rate by multiplying the tax rate by the value of benefits provided to employees paying tax at that rate and multiplying the answer by 100/100-x where x is the rate of tax. The value of the benefit is the cost to the employer of providing it, including VAT where applicable, even if this is subsequently recovered.

Calculations should be retained for at least three years from the end of the tax year to which they relate.

Class 1B National Insurance contributions are due at the 2024/25 rate of 13.8% on the value of benefits included within the PSA on which Class 1 or Class 1A contributions would otherwise be due plus the amount of tax due under the PSA.

HMRC may permit an alternative calculation to reduce the burden for the employer. For example, where it is impracticable to work out the actual number of employees paying tax at each rate (as may be the case for a party provided for a large number of employees), the tax due can be calculated by reference to a sample number of employees. However, records should be kept of the overall cost of providing the benefits, the number of employees and the representative sample of the tax rates of the employees involved.

Submitting the calculation to HMRC

The easiest way to send the calculation to HMRC is to use the online service. The service, Tell HMRC about the value of items in your PAYE Settlement Agreement, is available on the Gov.uk website at www.gov.uk/guidance/tell-hmrc-the-value-of-items-in-your-paye-settlement-agreement.

 To submit the calculation, the following information is required:

• Employer PAYE reference.
• The tax year to which the PSA relates.
• The type of expenses and benefits included within the PSA.
• The number of employees who receive the relevant benefits and expenses, including those whose earnings are below the personal allowance.
• The marginal rate of tax for employees receiving the benefits (note- the lowest rate of tax is used for employees who are non-taxpayers).

The costs should be grouped for each type of benefit. For example, if the PSA included five staff entertainment events in the year, the total cost for all five should be reported as a single item rather than reporting the cost of each individual event separately. Calculations must be included for all taxpayers (including Scottish and Welsh taxpayers) in a single submission- making separate submissions may result in a delay in processing the calculations.

Nil returns

Where an employer has a PSA in place but has not provided any benefits or expenses under it in 2024/25, they must submit a nil calculation. This may be the case where a PSA was set up for a previous year but not cancelled for 2024/25 by 5 July 2025.

Paying the tax and Class 1B National Insurance

Payment in respect of the tax and Class 1B National Insurance must be made by 22 October 2025 if payment is made electronically. If the employer pays by cheque, the cheque must reach HMRC no later than Friday, 17 October 2025- the payment deadline of 19 October falls on a Sunday in 2025.

Once HMRC have processed the calculation, they will issue a payslip confirming the amount due. This will contain the payment reference number which should be used when making the payment.

If the payslip has not been received when the time comes to make the payment, the amount should be paid anyway as interest is charged is the payment is made late.

In the absence of a payslip containing the payment reference, the SAFE reference should be used instead. This is the reference quoted in the covering letter sent when the PSA was first set up. The employer can obtain this reference by calling HMRC’s Employers Helpline 0300 200 3200. It is important that the correct reference is used- employers should not use their submission reference, their PAYE reference or their Accounts Office reference.