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HMRC internal manual

PAYE Settlement Agreements

Overview of PAYE Settlement Agreements

PAYE Settlement Agreements (PSA) are arrangements under which employers can settle, in a single payment, the income tax liability on, usually minor benefits in kind and expenses payments given to their employees.

Income Tax (Earnings and Pensions) Act 2003 Chapter 1 Part 11, Pay As You Earn Chapter 5 contains the rules governing PSAs. This replaces ICTA88/S206A (Introduced by FA96/S110) and the Income Tax (Employments) (Amendment No 6) Regulations S196/2631 that came into effect from 6 April 1996.

PSAs are statutory arrangements between employers and HMRC. From 1996/97 they replaced ‘Annual Voluntary Settlements’ which were similar, but non-statutory arrangements.

Employers with a PSA are liable for the income tax and NICs payable under them, their employees are relieved of liability on the benefits and expenses included in the agreement.

PSAs are entirely voluntary, an employer may choose a PSA or continue to operate PAYE/NICs by completing and submitting Employer’s Annual Returns.

A PSA will allow employers to

  • meet the tax and NICs payable on certain benefits in kind and/or expenses payments given to their employees,
  • reduce record keeping and paper work for themselves and their employee,
  • use a practical and flexible way of dealing with many of the minor and ‘one-off’ benefits found in today’s employment packages.

From 6 April 1999 Class 1B National Insurance contributions were introduced to align the NICs treatment of items included in a PSA with the tax treatment.

Where a PSA is agreed Class 1B NICs

  • replace any Class 1 or Class 1A NICs liability attached to the benefits and / or expenses included in the PSA, and
  • are payable on the total tax payable on a PSA.

Employers who wish to enter into a PSA will approach you with suggestions about what they would like to include. This could be the basis of discussion leading to a formal agreement. In suitable cases, you may draw the attention of an employer to the PSA scheme and invite them to consider whether they could benefit from using a PSA.

Detailed information about PSAs for employers can be found on the HMRC website at This replaced leaflet IR155 in April 2005.