PAYE Settlement Agreements (PSA) — Paying Tax on Staff Perks Without a P11D (2026)

What a PAYE Settlement Agreement Actually Is

A PSA is an annual agreement you make with HMRC that lets you settle the income tax and Class 1B National Insurance on certain benefits in one lump sum, on behalf of your employees. Instead of the benefit being reported on each worker's P11D and taxed through their own tax code, the value never reaches the employee's record at all. You pay the tax and NIC; they receive the perk completely tax-free.

That is the whole appeal. A PSA is a goodwill mechanism. It means you can say to a labourer or apprentice "here's a £40 thank-you and you don't owe a penny on it" without quietly creating a tax bill that lands on them the following January. For a trade firm trying to keep good people, that matters — workers rarely appreciate a perk that later costs them money, and a benefit that nudges someone into a higher tax band creates more resentment than goodwill.

The Three Qualifying Conditions

Not everything can go into a PSA. To be eligible, a benefit must be one of the following — minor, irregular, or impracticable to tax through payroll or share fairly between employees:

• Minor: small-value items such as a modest staff gift, a working lunch, or a token long-service award that falls outside the trivial-benefits rules.
• Irregular: one-off or unpredictable costs that don't recur on a fixed pattern — incidental overnight expenses when a job runs late, the occasional relocation cost, or a one-time training perk.
• Impracticable: benefits where applying PAYE properly, or dividing the cost fairly between individual employees, is genuinely difficult — a shared staff party, a jointly used work telephone, or a team meal where you can't reasonably split the value head by head.

Examples that fit a typical trade firm: staff entertaining that tips over the £150-per-head annual-function exemption (the whole cost becomes taxable once you breach £150, not just the excess), small staff gifts that don't qualify as trivial benefits, incidental overnight and travel expenses, the cost of a work mobile used a little privately, and certain training-related perks. These are exactly the awkward, low-value items a PSA was designed to mop up.

How the Tax Is Calculated — Grossing Up

This is the part that surprises most owners the first time. Because you are paying the tax on behalf of the employee, HMRC treats the tax you pay as itself a benefit — so it too must be taxed. To account for this, the value of the perk is "grossed up" at the employee's marginal rate of tax before the tax is calculated. In plain terms: you pay tax on the perk, and then tax on that tax.

A simple worked example. Say you give a basic-rate employee in England a perk worth £100, and they pay tax at 20%. To leave them £100 in real terms after the tax is covered, the grossed-up value is £100 ÷ (1 − 0.20) = £125. The tax due is 20% of £125 = £25. For a higher-rate (40%) employee the same £100 perk grosses up to £100 ÷ (1 − 0.40) = £166.67, with tax of £66.67. Scottish taxpayers are grossed up at the relevant Scottish rates, which is why employers with a mixed workforce calculate the gross-up rate band by band.

On top of the grossed-up tax, you also owe Class 1B National Insurance. Class 1B is charged at the employer's Class 1A/secondary rate on the combined total of the benefits provided plus the grossed-up tax due under the PSA. So the final bill is: grossed-up tax + Class 1B NIC on (benefit value + grossed-up tax). A £100 perk to a basic-rate worker can therefore cost you appreciably more than £100 once the gross-up and Class 1B are added — budget for it as roughly a third to a half on top, depending on the tax band.

The Deadlines — 5 July and 22 October

Two dates govern a PSA, and they fall after the end of the tax year the perks relate to (the UK tax year ends 5 April):

• 5 July: the PSA must be agreed with HMRC by 5 July following the end of the tax year. For perks given in the 2025/26 tax year, the agreement must be in place by 5 July 2026.
• 22 October (electronic) / 19 October (post): the tax and Class 1B NIC are due by 22 October after the tax year if you pay electronically, or by 19 October if you pay by post. Miss it and HMRC can charge interest and penalties.

A useful change: PSAs are now enduring agreements. Once you have one in place, it rolls over automatically each year and continues to apply unless you or HMRC vary or cancel it. You no longer have to re-apply every year — though you should still review the categories of benefit each year to make sure the agreement still covers what you're actually giving out.

What Can't Go in a PSA

A PSA is for minor, irregular and impracticable benefits only. The following are specifically excluded and must continue to be dealt with through payroll or a P11D:

• Cash payments: wages, bonuses and any cash given to an employee go through payroll under normal PAYE — you can't bury a cash bonus in a PSA.
• Large or regular benefits: company cars, van benefit charges and private fuel are substantial, recurring benefits — they belong on the P11D (or are payrolled), not in a PSA.
• Round-sum allowances: fixed cash allowances paid regardless of actual spend are treated as pay and run through payroll.

If a benefit is significant, recurring, or really a substitute for salary, assume it does not belong in a PSA. The agreement is for the small, fiddly stuff — not a way to take the headline benefits off your payroll reporting.

PSA vs Trivial Benefits vs P11D — When Each Applies

These three routes overlap, so it helps to know which one to reach for. Work down the list in order:

• Trivial benefits (the £50 exemption) first. If a perk costs £50 or less per employee, isn't cash or a cash voucher, isn't a reward for work or performance, and isn't in the employee's contract, it's a trivial benefit and is completely tax-free with no reporting at all. A £40 birthday gift card, a turkey at Christmas, a round of teas and bacon rolls on a cold site — these usually qualify and never need a PSA. (Directors of close companies have a £300 annual cap on trivial benefits.)
• PSA next. If a perk fails the trivial-benefits test because it's a bit over £50, or is impracticable to value per head, but it's still minor or irregular — a staff party over £150 a head, a slightly larger gift, incidental overnight costs — a PSA is the tidy way to settle it without touching the employee.
• P11D for everything else. Bigger, regular benefits in kind — vans available for private use, fuel, medical insurance — go on the P11D (or are payrolled), with Class 1A NIC due from the employer and the benefit taxed on the employee.

In short: try to make it a trivial benefit; if you can't, see if a PSA fits; and if it's a big recurring benefit, it's a P11D job. Getting this order right is what keeps perks off your team's tax codes and your admin manageable.

Quick Reference: PSA at a Glance (2026)

Putting It Into Practice

For most trade firms the workflow is simple. Through the year, log any perk that isn't plain pay — the value, the date, who received it, and whether it could be a trivial benefit. After 5 April, sort that list: trivial benefits drop out with no action, big recurring benefits go on the P11D, and the awkward middle goes into your PSA. Get the agreement confirmed with HMRC by 5 July, calculate the grossed-up tax and Class 1B NIC, and pay by 22 October. Keeping the records clean during the year is what makes the July and October deadlines painless rather than a scramble.

This is general information, not tax advice. The gross-up rates, NIC thresholds and exemptions change, and Scottish taxpayers are treated differently — speak to your accountant or payroll bureau before setting up or relying on a PSA, and have them run the actual figures for your workforce.