A PAYE Settlement Agreement lets an employer make a single annual payment covering all the tax and National Insurance due on minor, irregular or impracticable benefits given to employees [1]. The tax due is paid to HMRC by 22 October following the tax year, or 19 October where payment is made by post, and the employer settles Class 1B National Insurance at 15% on the same bill rather than Class 1A [3]. For a business that hands out a staff party, a few gift vouchers, or an occasional reward, a PSA removes those items from the payslip and the P11D entirely.
The value of a PSA is administrative. Instead of reporting a small benefit on every affected employee's record, taxing it through payroll, or listing it on a P11D, the employer settles the whole lot in one calculation and one payment [1]. The employee receives the benefit with no tax or National Insurance of their own to pay, which is often the point of giving it [12].
This article explains what a PSA is, which items qualify and which are barred, how the grossing-up calculation and Class 1B National Insurance work, the deadlines for applying and paying, and how the enduring-agreement rules changed the annual routine.
Key takeaways
- A PSA covers the tax and National Insurance on minor, irregular or impracticable benefits, paid by the employer in one annual settlement.
- The employer pays Class 1B National Insurance at 15% for the 2026-27 tax year on the grossed-up value of the items and the tax on them.
- Items must be grossed up at each employee's marginal tax rate, so the same benefit costs more for a higher-rate employee.
- An employer must apply for a PSA by 5 July following the end of the tax year, and the agreement now endures until changed or cancelled.
- The tax and Class 1B National Insurance are due by 22 October, or 19 October if paid by post.
What a PSA is
A PAYE Settlement Agreement is a statutory agreement between an employer and HMRC that allows the employer to account for the tax and National Insurance on certain benefits itself, rather than passing the charge to employees [1]. Where an item is covered by a PSA, the employer does not put it through payroll to work out tax and National Insurance, and does not pay Class 1A National Insurance on it at the year end; the employer pays Class 1B National Insurance as part of the PSA instead [1].
The mechanism exists to remove disproportionate administration. Reporting a £30 gift to two hundred employees individually, and taxing each one, costs far more in effort than the tax involved, so HMRC allows the employer to settle the whole thing once [12]. Because the employer bears both the tax and the National Insurance, the benefit reaches the employee free of any deduction, which is why PSAs are common for staff rewards and events [2].
A PSA sits alongside the other routes for handling benefits in kind rather than replacing them. Regular, contractual or high-value benefits still go through payroll or onto a P11D and benefits in kind report, while the PSA absorbs the small and awkward items that do not fit those routes [10].
What can go in a PSA
An item can only be included in a PSA if it falls into one of three categories: minor, irregular, or impracticable [2]. These are not loose descriptions but defined tests, and an item that fails all three cannot be settled through a PSA [10]. The table below sets out the three categories with typical examples.
| Category | What it means | Typical examples |
|---|---|---|
| Minor | Small in value | Small gifts, gift vouchers, a working lunch |
| Irregular | Not paid at regular intervals, and not a contractual right | A staff summer party, a one-off incentive |
| Impracticable | Hard to value or divide between individual employees | Shared staff entertainment, some relocation costs |
An irregular benefit is one that is not paid at regular intervals over the tax year, such as weekly or monthly, and to which employees have no contractual right [2]. An impracticable item is one that is difficult to place a value on or to divide up between employees, and the employer must be able to show that normal reporting cannot be followed without a disproportionate amount of effort or record keeping [8]. Whether an item is minor is judged on its value rather than its type, so a modest gift qualifies while a large one does not [9].
What cannot go in a PSA
Some items are barred regardless of how small or awkward they are. A PSA cannot be used to settle the tax on cash payments, including cash incentive awards, nor on round-sum allowances [10]. These are treated as earnings and must go through payroll in the normal way [10].
High-value or regular benefits are also outside a PSA, because they fail the minor and irregular tests [2]. A company car, private medical insurance, or a regular contractual benefit belongs on a P11D or in payroll, not in a PSA [10]. An employer unsure where a particular perk belongs should check its treatment against the rules for benefit in kind tax before assuming a PSA will cover it.
How the PSA calculation works
The PSA calculation has two moving parts: grossing up the value of the benefits, then applying Class 1B National Insurance to the result. Both steps fall on the employer, and both increase the true cost of the benefit well above its face value [12].
Grossing up
Because the employer pays the tax that the employee would otherwise pay, that paid tax is itself a taxable benefit, so the value has to be grossed up to the amount of pre-tax pay that would leave the net benefit after tax [12]. The grossing-up formula is the benefit multiplied by the marginal tax rate divided by one hundred minus the marginal tax rate [13].
The marginal rate matters because the same benefit costs the employer more for a higher-paid employee. The table below shows the grossed-up tax on a £100 benefit at the England and Northern Ireland income tax rates for the 2026-27 tax year.
| Employee marginal rate | Grossing-up tax on £100 | Grossed-up value |
|---|---|---|
| Basic rate (20%) | £25.00 | £125.00 |
| Higher rate (40%) | £66.67 | £166.67 |
| Additional rate (45%) | £81.82 | £181.82 |
Employees must be grouped by their marginal rate, and an employee who pays no tax with the employer is included at their first chargeable rate [12]. Scottish taxpayers are grossed up using the Scottish income tax bands rather than the England and Northern Ireland rates, so an employer with a mixed workforce runs the calculation separately for each tax regime [12].
Class 1B National Insurance
Once the benefits are grossed up, the employer applies Class 1B National Insurance to the total. Class 1B is charged at 15% for the 2026-27 tax year, matching the standard employer secondary rate that rose to 15% on 6 April 2026 (gov.uk). It is payable only by the employer and gives the employee no benefit entitlement, unlike primary Class 1 contributions [7].
Class 1B applies to a wider base than the benefits alone. It is charged on the grossed-up value of the items in the PSA plus the tax due on them, so the National Insurance is levied on the tax as well as on the benefit [12]. Taking a £100 benefit given to a basic-rate employee, the grossed-up value is £125, and Class 1B at 15% adds £18.75, so the total cost to the employer is £143.75 for a benefit the employee valued at £100 [13]. Modern payroll software for SMEs can hold the benefit records that feed this calculation, so the year-end figure is assembled from data already captured rather than reconstructed from receipts.
Deadlines and the enduring agreement
A PSA runs on two dates: one to put the agreement in place, and one to pay. Missing either has consequences, so employers treat both as fixed points in the year-end calendar [3].
Applying for a PSA
An employer must apply for a PSA, or make amendments to an existing one, by 5 July following the first tax year it applies to [11]. The application sets out the items the employer wants to include, and HMRC confirms the agreement in writing [4]. An item added after the 5 July deadline cannot be brought into that year's PSA and must be dealt with another way [4].
The renewal burden has eased since the rules changed. From 6 April 2018 the requirement to renew a PSA every year was removed, and a PSA is now an enduring agreement that remains in place until the employer or HMRC changes or cancels it [14]. An employer with a stable set of benefits therefore agrees the PSA once and simply calculates and pays each year, amending the agreement only when the items change [5].
Paying the PSA
The tax and Class 1B National Insurance due under a PSA must be paid by 22 October following the tax year the agreement covers, or by 19 October where payment is made by post [3]. The payment covers the whole PSA in a single amount, calculated by the employer and paid against a PSA reference issued by HMRC [6]. Late payment attracts interest, and cleared funds must reach HMRC by the deadline rather than merely being sent by it [7].
The gap between the two dates is deliberate: the employer agrees the scope by 5 July, then has until 22 October to gather the figures, gross them up and pay [3]. Businesses that manage benefits across several employers, such as accountants running client payrolls, often diarise both dates per client, a task that a multi-client payroll dashboard keeps visible alongside the RTI and P11D calendar.
When a PSA is worth it
A PSA is not automatically cheaper than the alternatives, because the employer absorbs tax the employee would otherwise pay, plus Class 1B on top [13]. The saving is in administration and in the employee experience, not in the tax bill itself [12]. For a small, one-off reward spread across many employees, the effort saved usually justifies the extra cost, while for a large benefit given to a few people the P11D route is often more economical [10].
The wider direction of travel also matters. As HMRC moves more benefits towards being taxed through payroll in real time, the pool of items best suited to a PSA is the residue that genuinely resists per-employee reporting [2]. Employers reviewing their benefits each year should test each item against the minor, irregular and impracticable definitions rather than rolling last year's list forward unchecked [8]. Platforms that embed UK payroll through an HMRC-recognised payroll API can hold benefit data through the year so the PSA scope is a report rather than a reconstruction.
How a PSA sits beside payrolling benefits
A PSA is one of three ways to deal with a benefit, and choosing between them is the real decision. The employer can tax the benefit through payroll in real time, report it on a P11D and pay Class 1A, or settle it through a PSA and pay Class 1B [10]. Each route puts the reporting and the cost in a different place, and the right choice depends on the value of the item and how many employees receive it [12].
Payrolling and the P11D pass the tax to the employee, whereas the PSA keeps it with the employer, which is the feature that makes a PSA suitable for a reward the employer wants the employee to receive in full [1]. An employer already listing larger benefits on a P11D form can reserve the PSA for the small, shared and awkward items that the P11D handles poorly, using each route for what it does best [2].
Conclusion
A PAYE Settlement Agreement trades a little extra cost for a lot less administration and a cleaner deal for the employee. The employer picks up the tax and the Class 1B National Insurance, grosses the benefit up to reflect that, and settles everything in one payment by October, without troubling a single payslip or P11D.
The discipline that keeps a PSA useful is annual review. Because the agreement now endures, the risk is not forgetting to renew it but forgetting to check that the items inside it still qualify as minor, irregular or impracticable. An employer that revisits the list each year, grosses up at the right marginal rates, and pays on time turns the PSA from a year-end scramble into a single, predictable line in the compliance calendar.
FAQs
What is the difference between Class 1A and Class 1B National Insurance?
Class 1A is the employer National Insurance charged on most benefits in kind reported on a P11D, such as a company car. Class 1B is the employer National Insurance charged on items settled through a PAYE Settlement Agreement, and it applies to the grossed-up value of the benefits plus the tax the employer pays on them. Both are employer-only charges at 15% for the 2026-27 tax year, but an item cannot attract both: a benefit inside a PSA carries Class 1B instead of Class 1A.
When must an employer apply for and pay a PSA?
An employer must apply for a PSA, or amend an existing one, by 5 July following the end of the tax year it applies to. The tax and Class 1B National Insurance due are then paid by 22 October following that tax year, or by 19 October where payment is made by post. Since 6 April 2018 a PSA endures until changed or cancelled, so an employer does not need to reapply each year once the agreement is in place.
Why does the value of a benefit have to be grossed up in a PSA?
Because the employer pays the tax the employee would normally pay, and that paid tax is itself a taxable benefit. Grossing up calculates the pre-tax amount needed to leave the intended net benefit after tax, using each employee's marginal rate. The formula is the benefit multiplied by the marginal rate divided by one hundred minus the marginal rate, so a £100 benefit for a basic-rate employee grosses up to £125.
Can cash bonuses be included in a PAYE Settlement Agreement?
No. A PSA cannot be used to settle the tax on cash payments, including cash incentive awards, or on round-sum allowances. These are treated as earnings and must be put through payroll under PAYE in the normal way. A PSA is limited to benefits and expenses that are minor, irregular or impracticable, such as small gifts, staff entertainment and occasional non-cash rewards.
