What You Need to Know About PAYE Settlement Agreements

PAYROLL & EMPLOYMENT TAX

3K Financial & Accounting Services Ltd  |  Keeping Klient Knowledgeable

Employers are heading into a period of significant change in how benefits and expenses are reported. When payrolling of benefits in kind becomes mandatory, the year-end P11D process will no longer be available to correct things that were missed, and HMRC is also expected to lift its soft-touch approach. That puts more pressure on employers to identify taxable benefits in real time.

In that environment, PAYE settlement agreements (PSAs) matter more than ever. HMRC has also just closed a call for evidence on how PSAs work, so changes could follow.

What is a PSA?

A PSA is a voluntary arrangement between an employer and HMRC. The employer pays one annual amount covering the income tax and Class 1B National Insurance on certain benefits and expenses, instead of reporting them through payroll or on P11D forms. It can be used for items that are:

minor,

irregular, or

impracticable to allocate and report through normal payroll.

Common examples include staff entertaining, annual events above the exemption, certain gifts and awards, and relocation items above exempt limits.

Key dates

Agreeing a PSA: by 5 July following the end of the relevant tax year. For 2026-27, that means 5 July 2027.

Calculations: after the year ends, employers calculate the taxable value of each PSA category, the grossed-up tax, the Class 1B NIC and any higher or additional rate consequences. Do this before payment is due.

Payment: generally by 22 October following the tax year if paying electronically, or 19 October if paying by post. For 2025-26 that is 22 October 2026.

Late payment can mean interest and penalties, so if you have a 2025-26 PSA, check your payment is ready now.

Why employers like them

No individual tax bill for employees. A small reward does not turn into an unexpected tax liability months later, which protects the goodwill the gift was meant to create.

Simpler administration. Certain benefits do not need to be reported person by person.

Fewer employee queries and more certainty over how agreed categories of spend are treated.

Why mandatory payrolling raises the stakes

Employers have traditionally had two chances to get benefits right: during payroll, and through P11D reporting at the year end. With mandatory payrolling, there will be less room to put omissions right afterwards. Where a benefit genuinely qualifies for PSA treatment, the employer can avoid employee-level real-time reporting altogether, which makes a PSA a useful risk-management tool.

Is your PSA still fit for purpose?

Many PSAs were agreed years ago, before hybrid working, wellbeing initiatives and flexible rewards became common. A frequent problem is wording that is too narrow, so items you assume are covered may not be. Ask yourself:

Does the PSA reflect the benefits you provide today?

Are all eligible categories included, and is the wording broad enough for future changes?

Are any items being handled inefficiently outside the PSA?

A practical action plan

Review your current PSA wording.

Map your employee benefits and expenses against the PSA categories.

Identify and fix any gaps, including agreeing new categories with HMRC where needed.

Think about how future payrolling will interact with your PSA, and check your annual calculations.

If you do not have a PSA, consider whether you should.

If you would like a PSA health check or help with the calculations and payment, contact us.

KEY TAKEAWAYS A PSA lets employers settle tax and Class 1B NIC on minor, irregular benefits in one annual payment. Payment for 2025-26 is normally due by 22 October 2026 if paid electronically. Mandatory payrolling makes it important to review PSA wording now.