Last updated: 16 October 2026
What is a PAYE Settlement Agreement?
A PAYE Settlement Agreement (PSA) lets an employer pay the tax and National Insurance on certain benefits and expenses for its employees, so the employees are not taxed on them. The benefits do not go on P11Ds or through payroll. Many employers use a PSA for staff events, gifts and other small or irregular items that would be awkward to report one by one.
What can go in a PSA?
Items must fall into one of three groups:
- Minor: small items such as incentive awards, staff entertainment that goes over the £150 party limit, or small gifts
- Irregular: one-off items, such as relocation costs above the £8,000 exempt limit or occasional use of a company flat
- Impracticable: items where it is hard to value or split the benefit per person, such as shared cars or some client hospitality given to staff
You cannot include cash wages or bonuses, high-value benefits such as company cars given regularly, or large one-off sums.
How the cost is worked out
The employer pays income tax on the value of the items, grossed up because the tax paid is itself a benefit. The rate depends on each employee’s tax band. On top of that the employer pays Class 1B National Insurance at 15% in 2026/27 on the value of the items plus the tax.
Worked example
A company gives 10 basic-rate employees a weekend away worth £400 each, £4,000 in total.
- Grossed-up tax at 20%: £4,000 x 20/80 = £1,000
- Class 1B NIC at 15% on £5,000 (£4,000 + £1,000): £750
- Total PSA cost: £1,750
The employees pay nothing and the item does not appear on their tax record.
How to apply for and run a PSA
You apply online through HMRC’s PSA service, or by post if you cannot use it. A PSA is an enduring agreement, so you do not need to renew it each year: it continues until you or HMRC cancel it or you change it. You must still tell HMRC the value of the items covered every tax year, even if it is nil. HMRC closed its PSA email mailbox in August 2025, so applications, changes and calculations now go through the online forms. The main dates, as set out on gov.uk, are:
| Step | Deadline |
| Apply for or update the PSA | By 5 July after the end of the tax year |
| Send the PSA calculation | HMRC recommends by 31 July after the end of the tax year, so it can send you a payslip |
| Pay electronically | 22 October after the end of the tax year |
| Pay by post | 19 October after the end of the tax year |
Late payment attracts interest and possible penalties.
Is the cost tax deductible?
Yes. The PSA payment and the cost of the benefits are normally allowable for corporation tax, as they are part of employment costs.
When a PSA is not the best choice
If an item is covered by an exemption, such as trivial benefits up to £50 or the annual party exemption of £150 a head, you do not need a PSA at all. For regular, valuable benefits, payrolling benefits or a P11D is usually cheaper.
Frequently asked questions
Can a PSA cover directors?
Yes, directors are employees for this purpose.
Does a PSA cover items given to non-employees?
No. Gifts to clients are dealt with under different rules.
What if I forget to include an item?
You can update the PSA before the 5 July deadline. After that, report the item on a P11D.
Do employees need to agree?
No, but it helps to tell them so they do not report the benefit themselves.
Related: staff party tax rules, employee reward schemes and reporting employee benefits.
Talk to Accotax
Want this handled for you? Our team at Accotax can help with PAYE Settlement Agreements and employee benefits. See our payroll services service, or contact us for a free, no-obligation quote.
This page is general guidance based on HMRC rules for the 2026/27 tax year, checked against gov.uk on 16 October 2026. It is not personal advice, so speak to an accountant about your own situation.
