Promotional material

Help with PAYE Settlement Agreement calculations — GfC1

Updated 19 May 2023

Purpose and scope of the guidelines

These guidelines are for employers who provide their employees with benefits in kind or expenses. They’ve been developed to help employers who enter into a PAYE Settlement Agreement (PSA).

These guidelines:

• outline HMRC’s preferred method of submitting calculations for PAYE Settlement Agreements
• help employers to reduce the risk of error when calculating amounts of Income Tax and Class 1B National Insurance contributions payable for benefits in kind and expenses accounted for with a PAYE Settlement Agreement

Background

A PAYE Settlement Agreement is a statutory arrangement with HMRC. An employer can pay the Income Tax liability and Class 1B National Insurance on minor benefits in kind and expenses payments given to their employees.

Employers with this agreement become liable for the Income Tax and National Insurance contributions payable. Their employees are relieved of their liability on the benefits and expenses included in the agreement. It’s voluntary, so an employer may choose to continue to operate PAYE National Insurance contributions by sending in Real Time Information submissions or form P11D.

The agreement allows employers to:

• meet the tax and National Insurance contributions payable on certain benefits in kind and expenses payments given to their employees
• reduce record keeping and paper work for themselves and their employees
• use a practical and flexible way of dealing with many of the minor and ‘one-off’ benefits provided by employers

Class 1B National Insurance contributions align the National Insurance contributions treatment of items included in an agreement with the tax treatment. Class 1B National Insurance contributions are payable only by employers and payment does not provide any benefit entitlement for individuals.

When a PAYE Settlement Agreement is agreed, Class 1B National Insurance contributions:

• replace any Class 1 or Class 1A National Insurance contributions liability attached to the benefits and expenses in the agreement
• are payable on the total tax payable on the agreement

Once it is agreed employers do not need to:

• operate PAYE or pay Class 1 or Class 1A National Insurance contributions on the benefits and expenses in the agreement
• include those benefits and expenses on forms P11D and P11D(b)

Find out what you need to apply for a PAYE Settlement Agreement online.

Employers must still keep records of what has been provided or paid to employees. Find more information on what records to keep.

Before entering into an agreement

Before entering into a PAYE Settlement Agreement, we expect employers to check whether they can declare any expenses or benefits within Real Time Information submissions, using form P11D or by payrolling taxable benefits and expenses (formally or informally). For more information check ‘Payrolling employees: taxable benefits and expenses’.

Wherever employers can reasonably attribute a taxable benefit or expense to an individual employee, these amounts should be reported through Real Time Information submissions, form P11D or by payrolling taxable benefits and expenses. By not attributing expenses and benefits to individuals where it is reasonable and proportionate to do so, the correct calculation of an employee’s tax code, benefit entitlement, personal allowances, student loan repayments, pension contributions and tax rate may be impacted.

How to enter into an agreement

PAYE Settlement Agreements are an agreement between an employer and HMRC. There is no specified format for this but HMRC’s preferred method of agreement is to apply for a PAYE Settlement Agreement online. If you write to us it may take longer to set up an agreement.

This agreement must include the types of benefits and expenses that the employer intends to include in future agreement calculations. Find out about expenses and benefits to include.

If your request is authorised, you’ll get a confirmation email or letter. You’ll then be sent your PAYE Settlement Agreement by post. This is sometimes referred to as a P626 Form.

An agreement can be made before, during or after the tax year. But it must be before 6 July following the end of the tax year for which it first applies. This agreement is enduring and remains in place until changed or cancelled by HMRC or the employer. You can also change or cancel an agreement online.

Find out about deadlines for applying and payment. Payments of tax and Class 1B National Insurance contributions can be made at any time after HMRC provides confirmation that your agreement is in place.

Check HMRC manual PSA1040 for more information on an agreement.

How to pay an agreement

Employers should pay the total amount due under a PAYE Settlement Agreement on or before 19 October (or on or before 22 October if paying electronically) following the end of the relevant tax year.

Once HMRC have processed your calculation they will issue a payslip confirming the amount due. You should quote the “charge reference” quoted on the payslip when making a payment.

Employers sometimes wait until HMRC has processed their PSA calculation and issued a payslip with a ‘charge reference’ before making a payment. This is not necessary and you may be charged interest on any amounts paid late.

If the payslip has not been issued you should use the reference number quoted in the covering letter when your enduring PAYE Settlement Agreement was first formalised. This is sometimes known as a SAFE reference. If you cannot find the reference number you should contact the HMRC office that formalised your agreement and ask for the reference number you should use.

Do not use your PAYE Accounts Office reference or PAYE reference number. Your payment may be delayed if you use the wrong reference.

All payments for amounts due under an agreement should be made by the due date even if HMRC has not yet processed the PAYE Settlement Agreement calculations and issued an invoice for payment.

Once HMRC has processed the PAYE Settlement Agreement calculations, if an employer has paid too much, HMRC will set it against any other amounts due (unless instructed otherwise).

Guidelines for Compliance — recommended approach

We have found a number of errors and emerging risks associated with PAYE Settlement Agreement calculations we receive. We’ll look to tell employers how to reduce these risks and provide details of our preferred method of submitting agreement calculations.

So that we do not over estimate the amount due, you should submit calculations either before or when you make payment. HMRC’s preferred method of receiving calculations is with a PSA1 form.

You can send a PSA1 form digitally by using either:

• email authentication
• your Government Gateway credentials

The PSA1 form can be submitted digitally for the 2021 to 2022 tax years onward.

Submitting calculations on the PSA1 form is HMRC’s preferred method of returning PAYE Settlement Agreement calculations. The digital form reduces processing time and common errors encountered in the process.

Use form PSA1 to tell HMRC the value of items included in your PAYE Settlement Agreement.

HMRC recommends that you review all relevant sources of data to find out which taxable benefits and expenses need to be included in your calculations before 6 July. This is so you can:

• identify any items which are not suitable for a PAYE Settlement Agreement at the earliest opportunity
• allow time for inclusion in Real Time Information submissions or form P11D
• avoid potential penalties and interest charges for any late and incorrect returns

Common errors and risks

These Guidelines for Compliance includes information to:

• reduce the risk of inaccuracies contained in their PAYE Settlement Agreement calculations
• help employers to avoid making the most common mistakes seen by HMRC

It does not replace the full, more detailed information found in the PAYE Settlement Agreement manual and the National Insurance manual.

What you can include in a PAYE Settlement Agreement

A PAYE Settlement Agreement does not replace the requirement that employers must operate PAYE on general earnings and return details of expenses and benefits in kind on forms P11D and P11D(b).

General earnings that may be considered include:

• taxable benefits provided or made available by reason of employment with the employer
• expenses paid to those employees

You can include these if they satisfy one or more of the following conditions:

• they are minor
• payable on an irregular basis
• given in circumstances where it is impractical to apply PAYE or apportion the value of particular benefits which have been shared by a number of employees

These terms have deliberately not been defined, as we introduced PAYE Settlement Agreements as a practical and flexible solution to dealing with ‘one-off’ benefits.

You should not include in an agreement items classed as trivial benefits.

More information on the conditions for applying the statutory exemption for trivial benefits can be found in the employment income manual.

The regulations require you and HMRC to agree that payments are of an amount, or are made in circumstances, which satisfy one or other of the following terms listed. Guidance to help you to interpret these terms in relation to PAYE Settlement Agreement is provided in the manual:

• for ‘minor’ see HMRC manual PSA1060
• for ‘irregular’ see HMRC manual PSA1070
• for ‘impracticable’ see HMRC manual PSA1080
• for ‘trivial’ see HMRC manual PSA1090

The above cannot apply to any of the following items:

• cash payments of wages
• other cash payments such as long service awards
• large benefits provided regularly to individual employees such as company cars, car fuel or beneficial loans
• round sum allowances
• shares, due to their complex tax legislation — as it is not possible to make quick and easy decisions as to the nature of any charge arising or on the valuation of shares
• payments into Funded Unapproved Retirement Benefit Schemes (FURBS)
• items from which tax has already been deducted under PAYE
• items which are already reflected in the employee’s tax code for that year
• profits arising from various mileage payment schemes and other regular items arising in employee car ownership schemes

Calculating the cost of the benefit

The amount should include the full cost of providing the benefit including all associated costs. It must include the full amount of VAT paid, whether or not you can later reclaim all or part of it.

Tax calculation

In calculating the amounts to be paid under a PAYE Settlement Agreement, employers should take into account the:

• amount of any expenses payments and the value of any benefits in kind which should be included
• number of employees receiving the payments or benefits concerned
• rate of tax that should be used in grossing up the tax due
• value of expense payments and benefits attracting a Class 1 or Class 1A National Insurance contributions liability
• grossed-up tax payable in the agreement, and Class 1B National Insurance contributions in respect of that tax
• rate of Class 1B National Insurance contributions which should be used to calculate National Insurance contributions liability

Although there is a legal framework for detailed calculation of the tax payable, it is open to the employer and HMRC to agree one method of calculation covering all items involved. It is intended that, the method of calculation will strike a balance between:

• the right amount of tax due
• any disproportionate amount of time that would otherwise have to be spent by the employer in producing a detailed breakdown

In practice, there are factors to consider which may impact the rate of tax and tax calculation for groups of employees, leading to incorrect calculations where they have not been taken into account. These considerations include the following.

Devolved tax payer rate

For employees based in Scotland or Wales the rate of Income Tax to be applied may be different to counterparts in England and Northern Ireland. As part of the agreement calculation, employers should identify those employees based in a devolved country with a different rate of Income Tax and ensure the appropriate rate is applied.

Calculating Income Tax percentage rate by sample

PAYE Settlement Agreements aim to offer flexibility and reduce the administration burdens for employers and HMRC.

Where items contained within a PAYE Settlement Agreement can be applied to specific employees, they should be.

However, where it is impracticable to allocate items to specific employees, for example where a staff party is provided for a large number of employees, the amount of tax payable under an agreement can be calculated by reference to a representative sample of the employees concerned.

To reduce the risk of an incorrect calculation, it is good practice to maintain records for each benefit that is calculated through a sample exercise for the following items:

• the overall cost of providing the benefits concerned
• the number of employees
• the representative samples of the tax rates of the employees involved

Without these details it is unlikely the amount provided in the PAYE Settlement Agreement calculation will be a true representation of the item provided.

Employees who pay no tax

Where an employee pays no tax with the employer, they should be included as being liable at their first chargeable rate of tax, the basic rate if England, Northern Ireland, and Wales, and starter rate if resident in Scotland, for the PAYE Settlement Agreement calculation purposes.

For example, if an employee in England pays no tax on their earnings with an employer — because their earnings are lower than their personal allowance, and they have a benefit included in a PAYE Settlement Agreement — the rate applied would be the basic rate (20% in 2022 to 2023).

Grossing up tax

Tax due on employee benefits and certain payments is the employee’s liability. Under a PAYE Settlement Agreement this liability is paid for employees by their employer. This settling of this liability by employers is a further benefit and ‘grossing up’ takes account of the additional tax liability created.

The basic method for calculating grossed up tax is:

1. Total value of benefit for relevant employees × Appropriate tax rate = Answer A

2. (Answer A) × 100 ÷ (100 - Appropriate tax rate) = Grossed up tax

This calculation must be repeated for every group of employees with a different tax rate, with results aggregated to give the total tax due.

Check HMRC manual PAYE72028 for further guidance and examples of grossing up.

Record retention for PAYE Settlement Agreement calculations

Employers must keep agreement records for not less than 3 years after the end of the most recent tax year to which they relate. This includes all books, documents and other records relating to the:

• qualifying general earnings comprised in the agreement
• calculation of amounts for which the employer is accountable to the HMRC in accordance with the agreement
• payment of those amounts to HMRC

Class 1B National Insurance contributions

National Insurance contributions (Class 1B) are due on most items included in a PAYE Settlement Agreement. Class 1B National Insurance contributions are payable only by employers and payment does not provide any benefit entitlement for individuals.

These are payable on:

• all items contained within an agreement which would normally attract a liability for Class 1 or Class 1A National Insurance contributions
• the total tax payable under the agreement

There are a limited number of scenarios where Class 1B National Insurance contributions are not liable. This includes the following:

Residence and presence conditions

Liability and entitlement to pay National Insurance contributions rests upon the satisfaction of prescribed conditions regarding residence in Great Britain (England, Scotland and Wales) or Northern Ireland. These conditions extend to Class 1B National Insurance contributions. For further guidance on this see HMRC manual NIM18150.

Social security payable to a country other than the UK

Regulation 42 provides that employers are excepted from liability for Class 1B National Insurance contributions in respect of employees who remain subject to the social security arrangements of a country, other than the UK:

• with which there is a reciprocal agreement
• which is the EU, Norway, Iceland and Liechtenstein

For further guidance on this see NIM19000

Items subject to tax, exempt from National Insurance contributions

There are a small number of items which are subject to tax but are exempt from National Insurance contributions liability. In the scenario where an item is subject to tax, but not liable for Class 1 or Class 1A National Insurance contributions, the item must remain in the calculation for tax purposes, but can be omitted when calculating Class 1B National Insurance contributions.

For more information on when Class 1 or Class 1A National Insurance contributions may not be liable, see HMRC manual NIM02020 and HMRC manual NIM14500.

Items liable for Class 1 National Insurance contributions — reimbursement timing

The payment of Class 1B National Insurance contributions replaces the payment of primary and secondary Class 1 National Insurance contributions and the payment of Class 1A National Insurance contributions. But a liability for Class 1B National Insurance contributions can only replace a liability for Class 1 or Class 1A National Insurance contributions which has not yet become due for payment.

This means that if a PAYE Settlement Agreement is agreed before the due date for the payment of the Class 1 or Class 1A National Insurance contributions then the Class 1 or Class 1A liability is replaced by a liability for Class 1B National Insurance contributions. The due date for payment of Class 1 National Insurance contributions is 14 days after the end of the tax month (or after the end of the tax quarter for employers who pay quarterly) and for Class 1A National Insurance contributions it is 19 July following the end of the tax year. If the agreement is agreed later than these dates, the original Class 1 or Class 1A liability will apply.

Calculating National Insurance contributions value

As with calculating the tax due under a PAYE Settlement Agreement, the calculation of Class 1B National Insurance contributions must account for the additional benefit provided to employees by virtue of a employers settling the liability of items accounted for in an agreement.

Class 1B National Insurance contributions are payable on the:

• value of all items covered by the agreement which would normally give rise to a Class 1 or Class 1A liability
• total amount of tax payable by the employer under the agreement

Class 1B National Insurance contributions will be due on the total tax payable under the agreement regardless of whether the PAYE Settlement Agreement includes any items which would normally be liable for Class 1 or Class 1A National Insurance contributions.

The table shows the appropriate Class 1B rate for agreements entered into for the following years.

Year settlement agreed	Class 1B National Insurance contributions percentage rate
2017 to 2018	13.80%
2018 to 2019	13.80%
2019 to 2020	13.80%
2020 to 2021	13.80%
2021 to 2022	13.80%
2022 to 2023	14.53%

Example 1

An employer provides benefits valued at £50 to 800 employees who pay tax at the basic rate and 200 who pay at the higher rate.

The value of items covered by the PAYE Settlement Agreement which give rise to a Class 1 and Class 1A liability is £50,000.

The tax and Class 1B National Insurance contributions payable under an agreement for 2021 to 2022 tax year and covering the whole workforce would be calculated as follows:

1. Value of benefits provided to basic rate employees (800 x £50) = £40,000
2. Tax due at 20% on £40,000 = £8,000
3. Gross up tax £8,000 x 100 ÷ (100 - 20) = £10,000
4. Value of benefits provided to higher rate employees (200 x £50) = £10,000
5. Tax due at 40% on £10,000 = £4,000
6. Gross up tax £4,000 x 100 ÷ (100 - 40) = £6,666.67
7. Total Tax Due = £16,666.67
8. The value of items liable for National Insurance contributions = £50,000
9. Class 1B National Insurance contributions due (£16,666.67 + £50,000) x 13.8% = £9,200.00

Example 2

An employer provides benefits valued at £50 to 1200 of their employees which would ordinarily attract a Class 1A National Insurance contributions liability for the 2021 to 2022 tax year. A PAYE Settlement Agreement is agreed on the basis that the payments are minor.

The employer states that:

• 700 employees pay tax at the basic rate
• 100 employees pay tax at the starter rate (Scotland)
• 200 employees pay tax at the higher rate
• 200 employees pay tax at the additional rate

Calculations and amounts:

1. Value of benefits provided to basic rate employees (700 x £50) = £35,000.
2. Tax due 20% on total value of benefits of £35,000 = £7,000.
3. Grossed up tax £7,000 x 100 ÷ (100-20) = £8,750.00.
4. Value of benefits provided to starter rate employees (100 x £50) = £5,000.
5. Tax due 19% on total value of benefits of £5,000 = £950.
6. Grossed up tax £950 x 100 ÷ (100-19) = £1,172.84.
7. Value of benefits provided to higher rate employees (200 x £50) = £10,000.
8. Tax due 40% on total value of benefits of £10,000 = £4,000.00.
9. Grossed up tax £4,000 x 100 ÷ (100 - 40) = £6,666.67.
10. Value of benefits provided to additional rate employees (200 x £50) = £10,000.00.
11. Tax due 45% on total value of benefits of £10,000 = £4,500.00.
12. Grossed up tax £4,500 x 100 ÷ (100 - 45) = £8,181.82.

The tax payable is £24,771.33 (by adding the grossed amounts £8,750.00 + £1,172.84 + £6,666.67 + £8,181.82).

Class 1B National Insurance contributions calculation

1. The value of items attracting Class 1A National Insurance contributions: £60,000 (£50 x 1200 employees)
2. Add the grossed up tax payable £24,771.33.
3. The total liable to Class 1B National Insurance contributions are: £84,771.33
4. Class 1B National Insurance contributions payable: £ 11,698.44 (£84,771.33 at 13.8%)

The total payable in the agreement is £36,469.77 (tax of £24,771.33 + Class 1B National Insurance contributions £11,698.44).

Next steps

What to do if you have made a mistake

It is anticipated employers will use these guidelines to inform their processes for calculating and returning tax and National Insurance contributions figures in relation to PAYE Settlement figures. Employers are asked to take relevant steps to correct any errors of calculation identified following use of these Guidelines for Compliance. This includes correcting errors:

• for future years
• in the current year
• for past years

Follow these steps to help the process of error correction.

Calculation errors

Where you discover that there has been an error in the calculation of tax and National Insurance contributions due on items included in a PAYE Settlement Agreement you must:

• check if the tax and National Insurance contributions paid in earlier years is also likely to have been incorrect
• recalculate the liability for the year or years in question, using estimates as appropriate

Where errors have been identified, check the numbered scenarios and follow the steps you need to take to correct any errors.

1. Items have been identified which are suitable for a PAYE Settlement Agreement and have been included within your P626 agreement but have been omitted, overvalued or undervalued in calculations

Where errors have been identified after calculations have been submitted to HMRC, these calculations should be appropriately amended. To do this, email payesettlementagreements@hmrc.gov.uk and include the following:

• details and supporting calculations of any amended or updated figures
• confirmation of the tax year the error relates to

2. Items have been identified which are suitable for a PAYE Settlement Agreement but have not been included within a P626 agreement or no P626 agreement is in place

If omitted items suitable for a PAYE Settlement Agreement are identified before 6 July following the end of the tax year in which the benefit in kind or expense was provided, but they are not included in a P626 agreement, it may be possible to either:

• update the items covered by your agreement — to do so follow the instructions in ‘Change or cancel a PAYE settlement Agreement’
• declare the items through a Real Time Information submission or the P11D process rather than through an agreement

Otherwise, as the deadline for the P11D process will have passed, the items omitted would need to be declared through one of the following:

• an amended P11D(s) and P11D(b) — this must be done through paper and more information on how to do this is included in ‘Reporting and paying’
• your customer compliance manager if you have one
• referring to the information in the ‘further questions’ section for details on how to contact HMRC for assistance

3. Items identified as unsuitable for a PAYE Settlement Agreement but not declared to HMRC through another method — identified before 6 July following the end of the tax year in which the benefit in kind or expense was provided

As these items are unsuitable for inclusion in an agreement, a more appropriate method must be used for declaring the item. The method of declaration depends on the item or items identified but include:

• P11D process
• payroll software (as in item of income or a payrolled benefit in kind)
• referring to the information in the ‘further questions’ section for details on how to contact HMRC for assistance

4. Items identified as unsuitable for a PAYE Settlement Agreement but not declared to HMRC through another method — identified after 6 July following the end of the tax year in which the benefit in kind or expense was provided

As the deadline for declaring benefits through the P11D process will have passed, the items omitted would need to be declared through:

• an amended P11D(s) and P11D(b). This must be done on paper and more information on how to do this is included in ‘Reporting and paying’
• your Customer Compliance Manager (CCM) if you have one
• referring to the information in the ‘further questions’ section for details on how to contact HMRC for assistance

Further questions

After reading these Guidelines for Compliance (GfC) if you have any further questions you can email us:

1. Make sure you include the GfC reference number in the subject line and if you have a Customer Compliance Manager (CCM) then copy them into the email.

2. Send them to ccgguidelinesforcompliance@hmrc.gov.uk.

Sending information by email carries certain risks and HMRC will assume that by sending information by email you understand and accept these risks.

Legislation and guidance

The main sources of available guidance relating to PAYE Settlement Agreements include:

• PAYE Settlement Agreement manual
• National Insurance manual
• PAYE Settlement Agreement overview
• Statement of Practice 5 (1996)

The most relevant legislation relating to PAYE Settlement Agreement is in the following table:

Income Tax (Earnings and Pension) Act 2003	PAYE regulations	National Insurance contributions
ITEPA 2003 Part 11. Pay As You Earn Chapter 5 (sections 705 – 707) PAYE Settlement Agreements PSA1020	Income Tax (PAYE) Regulations 2003 – SI 2003 No 2682 Part 6 (Regulations 105 – 117) PAYE Settlement Agreements PSA1030	Section 10A Social Security Contributions and Benefits Act 1992 Regulation 42 Social Security (Contributions) Regulations 2001 Statutory Sick Pay (General) Regulations 1982 Statutory Maternity Pay (General) Regulations 1986 Statutory Paternity Pay and Statutory Adoption Pay (General) Regulations 2002 Northern Ireland: Article 50 Social Security (Northern Ireland) Order 1998