There are various tax exemptions you can use to provide an employee with a one-off tax-free reward, such as certain ‘trivial’ benefits or long-service awards.
If the value of the reward exceeds the tax-free amount permitted, you can bear the tax and NICs (which the employee would normally pay) under a payroll settlement agreement (PSA) negotiated individually with HMRC.
The PSA procedure can also be used where the value of some occasional benefits provided to a group of employees, such as taxis home after working late or a staff party, exceeds the exempt amount permitted by HMRC.
Before you enter into a PSA, you need to know that the costs can be significant, as the benefit received is treated as being net of the associated tax and NICs charges. It is therefore not a case of merely applying the normal tax rates to the benefit received. For a top rate taxpayer, the tax and NIC can amount to 107% of the value of the benefit provided. However, this cost needs to be set against the savings you make in administrative time (by not having to deal with the benefit through the P11D or payroll) and employee goodwill generated, as your staff don’t pay the tax on the benefit they have received.
Until recently the PSA had to be applied for using the form P626. However, there is now an online service you can use to apply for a PSA. Whether you use the paper form or the online facility, HMRC will send you the finalised agreement by post, although a confirmation or receipt of your application will be sent by email or letter.
To set up a PSA for benefits provided in 2022/23 you need to enter into the agreement with HMRC no later than 5 July 2023. The tax and NICs due under that PSA must be paid by 22 October 2023.
Please contact us if you want to apply for a PSA.
