PAYE Settlement Agreement (PSA) Guide for Employers 2026/27
How a PAYE Settlement Agreement works in 2026/27: what you can include, how the grossed-up tax and Class 1B NI are calculated, deadlines and payment dates.
Quick answer
A PAYE Settlement Agreement lets an employer settle, in one annual payment, the income tax and National Insurance on minor, irregular or impractical-to-payroll benefits given to staff. The tax is grossed up at each employee's marginal rate, employer Class 1B National Insurance is added at 15 percent, and the total is paid after the tax year ends rather than month by month.
What a PSA is and why employers use one
A PSA is a voluntary arrangement between an employer and HMRC. Instead of reporting certain benefits on each employee's P11D or running them through payroll, the employer agrees to pay the tax centrally. The employee then receives the benefit with nothing deducted and nothing to report.
The appeal is simplicity and goodwill. Splitting the cost of a shared buffet across forty staff, or chasing the tax on a one-off gift, is administratively painful and can sour the gesture. A PSA absorbs that friction. It is most common for staff entertaining above the exempt limit, small non-cash gifts, and shared costs that cannot sensibly be attributed to named individuals.
What you can and cannot include
HMRC allows items that fall into one of three categories:
- Minor -- low-value benefits such as a small gift or a modest perk.
- Irregular -- benefits not provided at regular intervals, such as a one-off relocation cost above the exempt amount.
- Impractical -- benefits where applying PAYE to an individual, or dividing a shared cost, is genuinely impractical.
You cannot use a PSA for cash payments, regular high-value benefits, or anything that belongs in normal payroll such as salary, bonuses or round-sum allowances. Major benefits like company cars are reported through the usual channels, not a PSA.
How the cost is calculated
This is where employers are most often caught out. Because the employer is meeting the employee's tax bill, that payment is itself a benefit -- so HMRC requires the tax to be grossed up at the employee's marginal rate. You then add employer Class 1B National Insurance on top.
Step 1: group employees by marginal rate
Sort the benefit recipients by their highest income tax rate. For England, Wales and Northern Ireland in 2026/27 the bands are:
| Band | Rate | Gross-up multiplier on benefit value |
|---|---|---|
| Basic | 20% | value / 0.80 |
| Higher | 40% | value / 0.60 |
| Additional | 45% | value / 0.55 |
For Scottish taxpayers you use the Scottish bands instead: starter 19 percent, basic 20 percent, intermediate 21 percent, higher 42 percent, advanced 45 percent and top 48 percent. That means a Scottish PSA usually has six rate groups rather than three.
Step 2: gross up the benefit
If a higher-rate employee receives a benefit worth GBP 100, the grossed-up figure is GBP 100 / 0.60 = GBP 166.67. The income tax the employer settles is GBP 66.67, leaving the employee with the full GBP 100 benefit and no deduction.
A basic-rate employee with the same GBP 100 benefit grosses up to GBP 125 (GBP 100 / 0.80), so the tax is GBP 25. The marginal rate matters a great deal: the higher the rate, the larger the multiplier, and the more expensive the perk becomes for the employer.
Step 3: add Class 1B National Insurance
Class 1B is an employer-only charge at the employer National Insurance rate of 15 percent. Crucially, it applies to the value of the benefits plus the grossed-up tax the employer is paying.
Using the higher-rate example above, the grossed-up total is GBP 166.67. Class 1B at 15 percent is GBP 25.00. So a GBP 100 perk for a higher-rate employee actually costs the employer GBP 100 of benefit, GBP 66.67 of tax and GBP 25.00 of National Insurance -- around GBP 191.67 in total before considering the employer's own deduction for the expense.
A worked example
Imagine an employer provides a summer event costing GBP 6,000 across twenty staff, of whom twelve are basic-rate and eight are higher-rate, and the cost exceeds the annual function exemption so the whole amount is taxable through the PSA.
| Group | Benefit value | Gross-up | Tax | Class 1B (15%) |
|---|---|---|---|---|
| 12 basic-rate | GBP 3,600 | / 0.80 = GBP 4,500 | GBP 900 | -- |
| 8 higher-rate | GBP 2,400 | / 0.60 = GBP 4,000 | GBP 1,600 | -- |
| Totals | GBP 6,000 | GBP 8,500 | GBP 2,500 | GBP 1,275 |
Class 1B is 15 percent of the grossed-up total of GBP 8,500, which is GBP 1,275. The PSA bill is therefore GBP 2,500 of tax plus GBP 1,275 of National Insurance, GBP 3,775 in total, on top of the GBP 6,000 event cost.
You can sanity-check the National Insurance maths with the
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If any recipient is a Scottish taxpayer, gross up their share using the Scottish rate that applies to them. The extra bands -- intermediate 21 percent, higher 42 percent, advanced 45 percent and top 48 percent -- change the multipliers, so a UK-wide workforce can need both the rest-of-UK table and the Scottish table in the same calculation. Identify each employee's status from their tax code and residence, not from where the office is.
Comparison: PSA versus P11D
A P11D reports a benefit to a named employee, who pays the tax through their tax code or Self Assessment. A PSA moves the entire tax and Class 1B National Insurance liability to the employer, who settles it in one annual payment with no entry on the employee's record. Choose a P11D when a benefit clearly belongs to an individual and you want them to bear the tax; choose a PSA for minor, irregular or shared items, or when you want to absorb the cost as a gesture to staff.
Deadlines and payment
A PSA is an enduring agreement: once HMRC grants it, it generally rolls forward each year unless changed or cancelled. You should have it in place before the relevant items are provided.
The amounts for a tax year are calculated after that year ends, and the tax and Class 1B National Insurance are paid in the following tax year by a fixed autumn deadline -- not monthly with ordinary PAYE. Because the exact dates and any electronic-payment cut-offs can change, confirm the current PSA payment deadline on gov.uk before you rely on it. Late payment can attract interest and penalties.
Common mistakes to avoid
- Forgetting to gross up. Paying tax only on the face value understates the bill, because the tax payment is itself a benefit.
- Ignoring Class 1B. The 15 percent charge applies to the grossed-up total, not just the benefit value.
- Mixing in exempt items. Putting a qualifying trivial benefit in a PSA means paying tax you never owed -- check the exemption first.
- Using the wrong rate band. Always group by each employee's marginal rate, and use Scottish bands for Scottish taxpayers.
- Including ineligible items. Cash, regular high-value benefits and anything that belongs in payroll cannot go in a PSA.
The bottom line
A PSA is a clean way to give staff minor or shared benefits without burdening them with tax, but it is not free to the employer. Budget for the grossed-up tax at the right marginal rates plus 15 percent Class 1B National Insurance, keep clear records of what each employee received, and confirm the current application and payment deadlines on gov.uk. For anything outside the standard rates -- specialist benefits, deductibility questions or unusual cost-sharing -- take professional advice before agreeing the figures with HMRC.
Frequently asked questions
What is a PAYE Settlement Agreement (PSA)?
A PSA is an arrangement with HMRC that lets an employer settle the income tax and National Insurance on certain minor, irregular or impractical-to-allocate benefits given to staff. Instead of reporting each item on a P11D or through payroll, the employer pays a single annual amount that covers the tax due, so the employee receives the benefit free of any deduction. It simplifies reporting and is popular for things like staff entertainment and small gifts.
What can I include in a PSA?
HMRC allows three broad categories: minor benefits (small gifts or perks), irregular benefits (those not paid at regular intervals), and benefits where it is impractical to apply PAYE or to divide a shared cost between individuals. Typical examples include staff parties above the exempt limit, small non-cash gifts, and certain travel or telephone costs. You cannot include cash payments, high-value regular benefits, or anything that should run through normal payroll.
What is Class 1B National Insurance?
Class 1B is a special employer-only National Insurance charge that applies to items inside a PSA. It is paid on the value of the benefits included plus the income tax the employer is settling on the employee's behalf. The employer pays it once a year alongside the PSA tax. Employees pay no National Insurance on PSA items, which is one reason the arrangement is administratively attractive.
Why is the tax 'grossed up' in a PSA?
Because the employer is meeting the employee's tax bill, that payment is itself treated as a further taxable benefit. To make the employee genuinely no worse off, HMRC requires the tax to be calculated on a grossed-up basis using the employee's marginal rate. A basic-rate taxpayer's benefit is grossed up at 20 percent, a higher-rate taxpayer's at 40 percent, and so on, which makes the headline cost higher than the face value of the perk.
When do I have to apply for a PSA?
You should have a PSA in place before the items it covers are provided, or at the latest by the start of the relevant tax year for the cleanest position. HMRC operates an enduring agreement, so once granted a PSA generally rolls forward each year unless you or HMRC change or cancel it. Always confirm the current application route and any in-year deadlines on gov.uk before relying on timing.
When do I pay the PSA tax and Class 1B NI?
PSA amounts for a tax year are calculated after the year ends and paid in the following tax year. Payment is due by a fixed autumn deadline rather than monthly with normal PAYE. Because the exact dates and any electronic-payment cut-offs can shift, check the current PSA payment deadline on gov.uk so you do not incur interest or penalties for late settlement.
Does a PSA cover Scottish taxpayers correctly?
Yes, but the grossing-up must reflect Scottish income tax rates for employees who are Scottish taxpayers. Scotland has more bands -- starter 19 percent, basic 20 percent, intermediate 21 percent, higher 42 percent, advanced 45 percent and top 48 percent. You group employees by their marginal rate and gross up each group accordingly, so a Scottish PSA calculation usually has more rate categories than one for England, Wales or Northern Ireland.
Can I include trivial benefits in a PSA?
You usually do not need to. Trivial benefits that meet HMRC's conditions -- broadly a small non-cash item that is not a reward for work and not a contractual entitlement -- are already exempt and need no reporting at all. A PSA is for benefits that are taxable but minor, irregular or impractical to payroll. Putting a genuinely trivial benefit in a PSA would mean paying tax you did not owe, so check the exemption first.
How does a PSA differ from a P11D?
A P11D reports a benefit to a named employee, who then pays the tax through their tax code or Self Assessment. A PSA shifts the whole tax and National Insurance liability to the employer, who settles it in one annual payment with no entry on the employee's records. Use a P11D for benefits attributable to individuals; use a PSA for minor or shared items where individual reporting is impractical or where you want to absorb the cost.
Is the cost of a PSA tax deductible for the employer?
Generally the benefits provided and the associated PSA tax and Class 1B National Insurance are an allowable deduction for the employer's own tax, provided the underlying expense is incurred wholly and exclusively for the business. The precise treatment depends on the nature of each item, so confirm deductibility with your accountant and check the current rules on gov.uk before claiming.
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