What is a PAYE Settlement Agreement (PSA) — and When Should You Use One?

When you employ people, you’ll know that PAYE is the system for deducting tax and National Insurance from salaries. But what happens when you provide small perks, gifts, or expenses that don’t neatly fit into payroll or P11D reporting? That’s where a PAYE Settlement Agreement (PSA) can save you a lot of hassle.

What is a PSA?

A PAYE Settlement Agreement is a special arrangement you make with HMRC that lets your company pay the tax and National Insurance on certain expenses or benefits on behalf of your employees.

Instead of staff footing the tax bill for small perks and having to declare them individually, the business takes care of it in one go.

Effectively, you “gross up” the tax so your employees receive the benefit completely tax-free and you cover the cost.

What can you include in a PSA?

A PSA is designed for items that are:

• Minor – e.g. staff entertaining, small gifts, or vouchers.

• Irregular – one-off events like a taxi ride home after a late-night project, or a gift that doesn’t form part of normal pay.

• Impractical to calculate for each person – things like a company-wide event where working out the exact cost per head would be a nightmare.

Examples could be:

• Theatre tickets for your creative team as a thank-you.

• A staff summer party that doesn’t qualify as a tax-free “annual event.”

• Vouchers handed out to a group of freelancers and employees together.

What can’t you include?

You can’t use a PSA for:

• Cash payments (including salary, bonuses, or round-sum allowances).

• Large, regular benefits such as company cars or medical insurance (those go on a P11D instead).

When should you use one?

A PSA is useful if you:

• Want to give occasional perks or treats without creating tax admin headaches.

• Prefer to cover the tax cost yourself so employees enjoy the full value of the benefit.

• Are dealing with irregular or hard-to-calculate benefits that don’t sit comfortably in payroll.

In short, a PSA makes sense when you want to be generous with your team and keep things simple from a reporting perspective.

How to set up a PSA

You need to apply to HMRC before the 5 July following the tax year in which you gave the benefit. Once agreed, you’ll submit an annual calculation and pay the tax and Class 1B NICs due by 22 October (19 October if paying by cheque).

Final thought

A PAYE Settlement Agreement can be a smart way to reward your team without drowning in paperwork — but it does come at a cost, since you’re covering both the tax and the NICs. Think of it as part of your staff benefits budget: an investment in goodwill, morale, and keeping your business admin tidy.