Key takeaways
- A PAYE Settlement Agreement (PSA) lets an employer pay the employees' tax on certain benefits and expenses in one annual payment.
- It covers items that are minor, irregular or impracticable to put through payroll, such as staff awards or parties above the £150 limit.
- The employer pays the tax grossed up, because paying an employee's tax is itself a benefit, plus Class 1B NI at 15%.
- Items in a PSA do not go on P11Ds and employees do not pay tax on them.
- A PSA must be agreed by 5 July after the tax year, and the tax and NI paid by 22 October.
Some benefits are awkward to tax through the normal system: a one-off thank-you gift, a staff event that costs more than the tax-free limit, or a perk where splitting the cost between employees is impractical. A PAYE Settlement Agreement (PSA) lets the employer settle the tax itself, so employees are not surprised by a tax bill or a tax code change for something they saw as a gift.
What can go in a PSA
Items must fall into at least one of three categories.
| Category | Meaning | Examples |
|---|---|---|
| Minor | Small in value and not easy to handle through payroll or P11D | Small gifts to staff, non-cash incentive awards, personal expenses such as a phone bill paid once |
| Irregular | Not paid at regular intervals and not part of normal pay | Occasional relocation costs above the £8,000 exemption, attending a one-off event, an award for long service outside the exemption |
| Impracticable | Hard to put a value on, or to divide between employees | Staff entertainment above the £150 a head exemption, shared cars, pooled transport |
A PSA cannot include:
- cash bonuses or round-sum allowances
- high-value benefits provided regularly, such as company cars or private medical insurance
- items that are already exempt, such as trivial benefits of £50 or less
Since April 2018 PSAs have been agreed on a simpler basis: employers no longer need a formal agreement in advance each year, but the items must still meet the conditions.
How the tax is calculated
The employer pays:
- Income Tax on the value of each item, at the employee’s marginal rate (20%, 40% or 45%, or Scottish rates)
- Grossed-up tax: because the employer is paying tax that the employee would otherwise owe, that payment is itself a benefit, so the tax is grossed up
- Class 1B National Insurance at 15% on the value of the items and on the grossed-up tax
Example
An employer hosts a staff awards evening costing £400 a head, more than the £150 annual events exemption, and wants to settle the tax for 10 basic rate and 5 higher rate employees.
| Group | Benefit | Grossed-up tax |
|---|---|---|
| 10 basic rate employees (£4,000) | £4,000 | £4,000 × 20/80 = £1,000 |
| 5 higher rate employees (£2,000) | £2,000 | £2,000 × 40/60 = £1,333.33 |
| Total | £6,000 | £2,333.33 |
Class 1B NI = 15% × (£6,000 + £2,333.33) = £1,250.
The total cost of settling the tax is £3,583.33, on top of the £6,000 cost of the event. Because the whole event exceeds £150 a head, the full cost is taxable, not just the amount over £150.
Deadlines
| Step | Deadline |
|---|---|
| Agree the PSA with HMRC | 5 July after the end of the tax year |
| Send HMRC the calculation | As soon as possible after agreement, so HMRC can issue a payment reference |
| Pay the tax and Class 1B NI | 22 October after the tax year (19 October by post) |
For the 2026/27 tax year, that means agreeing the PSA by 5 July 2027 and paying by 22 October 2027. Late payment attracts interest and penalties.
How to set up a PSA
- Write to HMRC, or use the online service, with a description of the items you want to include and why they qualify.
- HMRC confirms the items covered.
- After the tax year, calculate the tax and Class 1B, including grossing up, and send the calculation.
- Pay by the October deadline using the reference HMRC gives you.
Keep records of who received each item and their tax band, so the calculation can be checked.
PSAs and P11Ds
Items included in a PSA do not go on employees’ P11D forms and are not included in their tax codes or tax returns. Make sure the same item is not reported twice, and that items excluded from the PSA are reported normally. See benefits in kind and P11D.
Frequently asked questions
What is a PAYE Settlement Agreement?
An arrangement under which an employer pays the tax and National Insurance on certain minor, irregular or impracticable benefits instead of the employees.
What is the deadline for a PSA?
Agree it with HMRC by 5 July after the tax year and pay the tax and Class 1B NI by 22 October.
What rate of National Insurance applies to a PSA?
Class 1B at 15%, on the value of the items and on the grossed-up tax.
Can I include a cash bonus in a PSA?
No. Cash payments and regular high-value benefits cannot be included and must go through payroll or on a P11D.
Sources
Rates, thresholds and rules in this guide were checked against HMRC and GOV.UK guidance in October 2026. Tax rules change, so check the current position on GOV.UK or with a qualified adviser before acting. This guide is general information, not personal advice.