A PAYE Settlement Agreement (PSA) lets an employer pay the Income Tax and National Insurance due on certain employee benefits and expenses directly to HMRC in one annual payment, rather than putting them through individual payslips or P11Ds. It is a popular way to deal with small, irregular or hard-to-value perks -- from staff gifts to relocation extras -- without burdening employees with a personal tax bill. This guide explains what qualifies, how the grossed-up tax works, and the key 2026/27 deadlines.
What a PSA Covers
A PSA is an agreement between an employer and HMRC that allows the employer to settle the tax on certain benefits in a single annual payment, so those items never need to appear on employees’ P11Ds or payslips. Only three categories of benefit qualify:
Minor benefits: small, one-off perks such as a modest gift or a taxi home after working late.
Irregular benefits: items provided occasionally rather than as a regular part of pay, such as a one-off staff event beyond the annual function exemption, or occasional use of a company flat.
Impracticable benefits: items that are genuinely difficult to value or apportion between employees, such as shared taxi journeys home or a group incentive trip.
Regular salary, cash bonuses, and major recurring benefits such as company cars cannot be included in a PSA -- these must always go through normal payroll or P11D reporting.
How the Grossed-Up Tax Is Calculated
Because the employer, not the employee, is paying the tax, HMRC requires the benefit value to be grossed up so the employee is treated as if they received the benefit tax-free and the employer bears the full cost of tax at the employee’s marginal rate.
For a basic-rate taxpayer in 2026/27, a £100 benefit is grossed up to roughly £125 before tax at 20% is applied, so the employer pays around £25 in Income Tax on that item. For higher and additional-rate employees the multiplier is larger, since more grossing-up is needed to leave them with the same net benefit after a higher rate of tax.
On top of the grossed-up Income Tax, the employer also pays Class 1B National Insurance at the employer NI rate on the total of the taxable benefits plus the Income Tax due under the PSA -- effectively NI on NI-equivalent value, calculated by HMRC once the PSA return is submitted.
Applying for a PSA
Employers apply online, or by letter to HMRC, listing the categories of benefit to be included. Once agreed, the PSA generally continues automatically each year unless the employer or HMRC changes it, so most employers only need to set it up once and review the categories periodically.
A new PSA for the current tax year should ideally be agreed before 6 Julyfollowing the end of that tax year, though HMRC can sometimes agree items after the event if approached promptly.
Deadlines and Payment
Employers must submit their PSA computation showing the benefits, grossed-up tax and Class 1B NIC by 31 July following the end of the tax year. Payment of the tax and NIC due must reach HMRC by 22 October (19 October if paying by post) following the end of the tax year -- for example, for 2026/27 benefits, payment is due by 22 October 2027.
Missing these deadlines can trigger interest and, in some cases, penalties, so employers using a PSA should build the July computation and October payment into their annual payroll calendar.
Frequently Asked Questions
What is a PAYE Settlement Agreement?
A PAYE Settlement Agreement (PSA) is a formal arrangement between an employer and HMRC allowing the employer to pay, in one annual sum, the Income Tax and Class 1B National Insurance due on certain minor, irregular or impracticable-to-value employee benefits, so employees do not have to report or pay tax on those items themselves.
Which benefits can go into a PSA?
Only benefits that are minor (small, one-off items), irregular (occasional rather than routine), or impracticable to value or split between individual employees can be included. Regular pay, cash bonuses, and significant ongoing benefits like company cars or private medical insurance must be reported normally through payroll or a P11D, not via a PSA.
Why would an employer use a PSA instead of putting benefits on a P11D?
A PSA avoids employees receiving unexpected personal tax bills for small perks, keeps administration simpler for genuinely hard-to-value items shared between staff, and lets the employer absorb the cost as a goodwill gesture -- useful for things like staff prizes, small gifts, or occasional taxi fares.
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Does the employer or employee pay the tax under a PSA?
The employer pays. The tax due is grossed up to reflect the employee’s marginal rate so that, after the calculation, the employee effectively receives the benefit tax-free, and the employer settles the full liability -- Income Tax plus Class 1B National Insurance -- directly with HMRC.
What is Class 1B National Insurance?
Class 1B is the specific National Insurance charge that applies to items settled under a PSA. It is paid only by the employer, calculated on the total value of the PSA benefits plus the Income Tax paid on them, and is separate from the Class 1 and Class 1A NIC that apply to normal pay and P11D benefits.
When must a PSA be submitted and paid?
The computation showing benefits, grossed-up tax and Class 1B NIC is due by 31 July following the end of the tax year, and payment of the total amount due must reach HMRC by 22 October following the end of the tax year (19 October for cheque payments by post).
Does a PSA need to be renewed every year?
Not usually. Once HMRC agrees a PSA, it typically continues automatically ("enduring") for future years covering the same categories of benefit, unless the employer or HMRC amends or cancels it. Employers should still review the agreed categories periodically to make sure they still match what is actually being provided.
Can staff Christmas parties be included in a PSA?
The annual function exemption already covers qualifying staff events costing up to £150 per head, so a compliant Christmas party often needs no PSA treatment at all. A PSA becomes relevant if a function exceeds the exemption limit or a second event pushes total annual entertaining spend over it, since the excess then becomes a taxable benefit that the employer may prefer to settle via the PSA rather than payslip it.
What happens if an employer misses the PSA deadlines?
Late submission of the computation or late payment can result in HMRC charging interest on the outstanding amount, and in cases of persistent lateness or non-compliance, penalties may also apply. Employers who anticipate missing a deadline should contact HMRC as early as possible to discuss the position.
Can relocation expenses be included in a PSA?
The standard relocation exemption already covers qualifying costs up to £8,000 tax-free, so only relocation extras above that limit, or items that fall outside the exemption's strict conditions, are candidates for a PSA -- and only if they are genuinely minor, irregular or impracticable to apportion between staff, rather than a routine, individually identifiable cost.
Disclaimer: This guide reflects PAYE Settlement Agreement rules and Class 1B National Insurance as they apply in 2026/27. This guide is for general information only and is not professional advice. Consult a qualified adviser and refer to gov.uk for current official guidance before relying on any treatment.
