How to Fill Out and Submit HMRC Form PSA02: PAYE Settlement Agreement

A PAYE Settlement Agreement (PSA) is a voluntary arrangement that lets a UK employer pay HMRC a single annual sum covering the Income Tax and National Insurance owed on certain minor, irregular, or impracticable-to-apportion benefits given to staff. With a PSA in place, those items stay off employees’ P11D forms and out of payroll, and staff have no personal tax liability on them; the employer pays Class 1B National Insurance instead of Class 1A.¹ The agreement must be finalised before 6 July following the end of the tax year it first applies to, and the resulting bill is due by 22 October.²

What Can Go Into a PSA

Under Regulation 106 of the Income Tax (PAYE) Regulations 2003, a benefit qualifies only if you and HMRC agree it is minor, irregular, or impracticable to apportion between individual employees.³

Minor items include low-value incentive awards, long-service gifts, telephone bills, or staff entertainment where costs slightly exceed an exemption threshold.
Irregular items are benefits that do not recur on a predictable schedule, such as relocation expenses above the £8,000 tax-free limit, overseas conference attendance, or a spouse’s travel costs when accompanying an employee abroad.⁴
Impracticable items are shared benefits where splitting the exact value per employee would be unreasonably difficult, such as a staff party with fluctuating headcount, shared company cars, or personal-care perks like hairdressing.

Wages, salaries, bonuses, round-sum allowances, beneficial loans, and high-value items like sole-use company cars cannot go in a PSA.⁵ Those are easy to quantify per employee and belong in payroll or on the P11D.

Trivial Benefits Are Already Exempt

A benefit that costs £50 or less to provide, is not cash or a cash voucher, is not a reward for work performance, and is not written into the contract counts as a trivial benefit. It is exempt from tax and National Insurance, and you do not need to report it on a P11D or in a PSA.⁶ Directors of close companies face a £300 annual cap on trivial benefits. Including truly trivial items in a PSA is a mistake HMRC regularly flags, so check the £50 threshold before adding anything to your list.⁷

How to Apply

You can apply before, during, or after the tax year, but the agreement must be finalised before 6 July following the end of the tax year it first covers. Miss that date and those benefits will need to go through payroll or onto P11D forms instead.⁷

The quickest route is HMRC’s online application service. You will need your employer PAYE reference (the three-digit number, forward slash, and letter-number mix on HMRC correspondence, such as 123/AB456), plus your business name, address, phone number, and email.⁸ Describe every expense and benefit specifically. “Annual staff Christmas party costing approximately £X for Y attendees” is much better than “staff entertainment.”

If you cannot use the online service, write to HMRC (PAYE Settlement Agreements, HM Revenue and Customs, BX9 2AN) describing the benefits you want covered.⁸ Either way, HMRC reviews your list, queries anything unsuitable, and then posts a P626 form. Sign and return it, and that P626 becomes your binding agreement.

Once approved, a PSA rolls forward automatically each tax year. You do not need to reapply. It stays active until you or HMRC cancels it, or you change the items it covers.⁸ Keep the signed P626 safe.

Working Out What You Owe

After the tax year ends, you produce two figures: grossed-up Income Tax and Class 1B National Insurance. Grossing up is where most employers slip. Because you are paying the tax on the employee’s behalf, that payment is itself a taxable benefit, and the calculation has to reflect that.

Grossing Up the Tax

Sort each benefit by the tax band of the employee who received it: basic rate (20%), higher rate (40%), or additional rate (45%) for employees in England, Wales, and Northern Ireland for the 2025–26 tax year.⁹ Scottish employees may fall under different rate bands, so check the Scottish rates separately. Employees who pay no tax with you are treated as basic-rate (or starter-rate for Scottish residents) for PSA purposes.⁷

For each rate group, first multiply the total value of the benefits by the tax rate to get an initial tax figure. Then multiply that figure by 100 and divide by (100 minus the tax rate). That produces the grossed-up tax.⁷

For example: £40,000 of benefits to basic-rate employees gives an initial tax of £8,000 (£40,000 × 20%). Grossed up, that becomes £10,000 (£8,000 × 100 ÷ 80). Add the grossed-up figures across all rate groups for your total Income Tax liability.

Class 1B National Insurance

Class 1B is charged on the combined total of benefit values plus grossed-up tax. For 2025–26 the Class 1B rate is 15%.¹⁰ Extending the earlier example: benefits of £50,000 plus grossed-up tax of £16,666.67 gives a Class 1B base of £66,666.67, so the National Insurance due would be £10,000.

Filing and Paying

HMRC’s preferred submission route is the PSA1 form through its online services, which reduces both processing time and common errors compared with paper.⁷ HMRC advises reviewing your data before 6 July so anything that does not belong in the PSA can still make it onto a P11D or into your Real Time Information submissions. PSA calculations themselves are due by 31 July after the end of the tax year.

Payment must reach HMRC by 22 October following the tax year the PSA covers. If paying by post, the deadline is 19 October.² Do not pay before you have filed your PSA1: HMRC cannot verify what the payment covers without the return.⁷

Several payment methods are accepted, with different clearing times:¹¹

Same or next day: online or telephone banking via Faster Payments or CHAPS, approval through your online bank account, debit or corporate credit card, or payment at your bank or building society.
Three working days: Direct Debit (already set up with HMRC), Bacs, or cheque by post.
Five working days: Direct Debit set up for the first time.

Use your PSA payment reference, not your PAYE Accounts Office reference or your standard PAYE reference. The wrong reference delays the payment and can leave the account showing as unpaid past the deadline.⁷

Miss October and HMRC charges late-payment interest, set at 7.75% as of January 2026, and financial penalties may apply on top.¹²

Changing or Cancelling

If the benefits you provide change, amend the PSA online or by post. The online service handles both changes and cancellations; postal changes go to the office that issued the original PSA, and HMRC posts back a revised P626 to sign.¹³

Cancelling does not wipe out what you already owe. Tax and National Insurance for the period the PSA was active still follow the normal 22 October and 19 October deadlines. Benefits provided after cancellation go back onto P11D forms or through payroll.¹³

Records You Have to Keep

Keep PSA records for at least three years after the end of the tax year they cover.¹⁴ What that means in practice depends on the benefit:

For benefits attributable to individuals, hold the same records you would need for a P11D, plus details of any cash payments made.
For shared benefits you cannot split per head, record the overall cost, the number of employees involved, and representative samples of those employees’ tax rates.¹⁴

Weak record-keeping is where PSA calculations fall apart during an HMRC check. Without documented cost totals, headcounts, and tax-rate breakdowns, the grossing-up numbers are effectively guesswork, and HMRC will treat them that way. Keep records throughout the year rather than reconstructing them after 5 April.

1
GOV.UK. PAYE Settlement Agreements
2
GOV.UK. PAYE Settlement Agreements – Deadlines and Payment
3
HM Revenue & Customs. Income Tax (PAYE) Regulations 2003 – SI 2003 No 2682
4
GOV.UK. Expenses and Benefits – Relocation Costs – What You Do Not Have to Report
5
GOV.UK. PAYE Settlement Agreements – What’s Included
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GOV.UK. Tax on Trivial Benefits
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GOV.UK. Help with PAYE Settlement Agreement Calculations
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GOV.UK. PAYE Settlement Agreements – How to Get a PSA
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GOV.UK. Income Tax Rates and Personal Allowances
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GOV.UK. National Insurance Rates and Categories
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GOV.UK. Pay a PAYE Settlement Agreement – Overview
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GOV.UK. HMRC Interest Rates for Late and Early Payments
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GOV.UK. PAYE Settlement Agreements – Change or Cancel a PSA
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GOV.UK. Overview of PAYE Settlement Agreements – Employer Record Keeping