HMRC PAYE Settlement Agreement: Rules, Deadlines, and Calculations

An HMRC PAYE Settlement Agreement (PSA) is a written arrangement that lets an employer pay HMRC a single annual sum covering the income tax and National Insurance owed on certain employee expenses and benefits, instead of putting those items through payroll or reporting them on individual P11D forms. Because the employer settles the bill, the benefit reaches the employee tax-free. PSAs are only available for items HMRC accepts as minor, irregular, or impracticable to allocate to individual employees, and the tax has to be “grossed up” because paying an employee’s tax is itself treated as a further taxable benefit.

What You Can Put in a PSA

To qualify, an item must fall into at least one of three categories. HMRC has left the terms loosely defined so that one-off situations can be accommodated.¹

Minor items: incentive awards, long-service awards, telephone bills, small gifts and vouchers, staff entertainment such as event tickets, and non-business travel that slightly exceeds the daily incidental overnight limit.²
Irregular items: benefits that do not recur on a set schedule and to which employees have no contractual right, for example relocation costs above the £8,000 tax-free threshold, overseas conference expenses, the cost of a spouse accompanying an employee abroad, and use of a company holiday flat.²
Impracticable items: things difficult to value individually or hard to divide between specific employees, such as non-exempt staff entertainment, shared company cars, and personal care costs like hairdressing.²

Several items are ruled out entirely. You cannot use a PSA for wages, cash payments such as bonuses or round sum allowances, company cars, car fuel benefits, beneficial loans, shares, or anything already going through PAYE or already reflected in an employee’s tax code.¹ High-value benefits provided regularly to individuals belong in payroll or on a P11D.

One boundary worth flagging: benefits meeting the trivial benefits exemption (not cash, costing £50 or less, not contractual, and not a reward for work) do not need to be in a PSA at all, because the exemption already removes the tax charge and the reporting duty.²³ If a benefit fails any one trivial-benefit condition, it becomes taxable and either needs normal reporting or PSA cover.

How to Apply

Since April 2023, employers and their agents can apply for, amend, or cancel a PSA through an HMRC online service. You need your PAYE reference, business name, address, telephone number, and email address.⁴ Agents without existing authorization must supply a signed letter of authority from the employer. Postal applications go to HMRC at BX9 2AN.⁵

Once HMRC agrees, it issues a draft P626, the formal PSA document, for the employer to sign and return; HMRC then sends a countersigned copy back. The P626 itself is still a paper document even though the application is online.⁵ The underlying rules require the agreement to be in writing, signed by both parties, and to specify the earnings covered, the calculation method, and the payment date.⁶

The Deadlines That Matter

The PSA cycle runs to a fixed annual pattern. For the 2024/25 tax year:

5 July 2025 to apply for a new PSA or amend an existing one.⁷
19 October 2025 to pay by post.⁸
22 October 2025 to pay electronically.⁸

The same pattern repeats for 2025/26, with applications by 5 July 2026 and payment by 19 or 22 October 2026.⁹ If a payment date falls on a weekend or bank holiday, the money must reach HMRC on the previous working day, unless you pay by Faster Payments through online or telephone banking.⁸ There is no separate statutory deadline for submitting the calculation, but it must accompany or precede the payment, and HMRC typically expects to start receiving calculations from late July.

Working Out What You Owe

A PSA costs more than the face value of the benefits because you are paying the employee’s tax, and HMRC treats that payment as a further taxable benefit. You have to gross the figures up before adding Class 1B National Insurance.

Grossing Up the Income Tax

The calculation runs separately for each group of employees taxed at the same marginal rate. Multiply the value of that group’s benefits by the tax rate to produce an initial tax figure, then divide that figure by (100 minus the tax rate) and multiply by 100 to reach the grossed-up amount.¹⁰ Basic, higher, and additional rate taxpayers are computed separately and added together.

Scotland and Wales use their own income tax rates, so the PSA calculation splits by jurisdiction. Scottish taxpayers carry an “S” prefix on their tax code and Welsh taxpayers a “C” for Cymru; if the code changes during the year, the year-end prefix generally determines which rates apply for the whole year.¹¹ Separate PSA1 forms are available for each jurisdiction. Employees earning below the personal allowance are not left out. For PSA purposes there is no zero-percent band; they are picked up at the first chargeable rate, meaning the basic rate in England, Northern Ireland, and Wales, and the starter rate in Scotland.¹²

Class 1B National Insurance

Class 1B NICs are charged on the combined value of the benefits plus the grossed-up tax. For 2024/25 the Class 1B rate is 13.8%.¹⁰ From April 2025 the rate rose to 15%, following the Autumn Budget 2024 increase in employer NICs; Class 1B is linked by statute to the secondary Class 1 rate.¹³ The 15% rate applies to PSA liabilities from 2025/26 onward.

Sending the Calculation to HMRC

The quickest route is the online PSA1 form. You need the tax year, PAYE reference, applicable rates by employee location, and the total VAT-inclusive value of each type of benefit broken down by tax band for each jurisdiction. An informal postal calculation is accepted but takes longer. All employees who received the benefits must be included, even those below the personal allowance.¹⁴

Once the PSA Is in Place

Since 2018/19, PSAs have been enduring agreements. Once agreed, a PSA stays live until either the employer or HMRC cancels it, and does not need annual renewal, though the value owed must still be reported every tax year.¹¹¹⁵

To change the types of benefit covered, you need a variation. It must be in writing, signed by both parties, and agreed by 6 July following the end of the first tax year to which the change relates. The online service handles amendments and cancellations as well as new applications. Either side can cancel by written notice; cancellation takes effect from the date of the notice, and the PSA no longer applies to earnings paid or provided after that date.⁶

If You Miss the Deadline

HMRC charges statutory interest on overdue PSA amounts and applies late-payment penalties on a sliding scale: 5% of the outstanding sum if unpaid 30 days after the due date, a further 5% after six months, and another 5% after twelve months.¹⁶

If no calculation is submitted, HMRC can issue a Regulation 110 determination, its own estimate of what you owe, which you then have 30 days to appeal.¹⁶ HMRC can also revoke the PSA entirely where calculations do not arrive by the payment date, opening the employer up to formal assessments, higher liabilities, and further penalties.¹⁷ Where the tax and Class 1B NICs are not properly reported, HMRC may compute the figure itself, potentially producing a higher charge and misallocated payments.⁸

Records You Need to Keep

PSA records must be kept for at least three years after the end of the tax year they relate to.⁶ In practice six years is safer, because HMRC can look back six tax years to recover underpaid tax and NICs where it considers reasonable care was not taken.¹⁸

For benefits attributable to named individuals, keep the same detail you would for a P11D. For shared benefits that cannot sensibly be split between individuals, such as a staff party, record the total cost, the number of employees involved, and a representative sample of their tax rates.¹⁸ If HMRC reviews the PSA and the supporting documentation is thin, it may recover underpaid tax and NICs and add penalties.

PSA, P11D, or Payrolling

There are three routes for handling taxable benefits, and the right one depends on the benefit and the employer’s preference.

P11D forms are the traditional annual return filed for each employee receiving reportable benefits. The employer pays Class 1A NICs separately, and the employee’s tax is collected through an adjusted PAYE code. The P11D deadline is 6 July after the tax year, with late-filing penalties of £100 per month for every 50 employees.¹⁹
Payrolling processes taxable benefits through monthly payroll in real time, so the employee’s tax is collected as it arises. It is currently voluntary but becomes mandatory from April 2027 for most benefits, at which point P11Ds largely disappear. Interest-free or low-interest loans and employer-provided accommodation will still be reported on P11D for now.²⁰
A PSA settles the grossed-up income tax and Class 1B NICs annually and takes the tax obligation off the employee. It is only appropriate for minor, irregular, or impracticable items.

Mandatory payrolling will not swallow PSAs. HMRC has confirmed that PSA-reported benefits sit outside the mandatory payrolling regime, and employers continue to pay the grossed-up tax and Class 1B NICs on those items in the usual way.²⁰

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GOV.UK. PAYE Settlement Agreements – PSA1050
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GOV.UK. PAYE Settlement Agreements – What’s Included
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Tax Adviser Magazine. Non-Reportable Employee Benefits and PAYE Settlement Agreements
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CIPP. New Online Service for PSAs
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GOV.UK. PAYE Settlement Agreements – How to Get a PSA
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GOV.UK. PAYE Settlement Agreements – PSA1030
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Moore. Employment Tax Upcoming Deadlines and Important Changes
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GOV.UK. PAYE Settlement Agreements
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CIPP. PSAs – Why the Deadlines Can Be Confusing
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