A Paye Settlement Agreement or PSA is an arrangement made by an employer with HM Revenue and Customs (HMRC) to settle some or all of the income tax and National Insurance contributions (NICs) due on certain expenses or benefits provided to their employees. With the onset of the 2020-21 financial year, employers in England and Northern Ireland must keep abreast of the new PSA calculations.
The PSA Calculation:
The calculation of the PSA for the 2020-21 financial year is a bit different than the previous year`s calculation. The calculation of the PSA for the previous year was split between two rates; the lower rate of 13.8% and the higher rate of 14.8%. However, from 2020-21, there is only one rate that is applied, that being the higher rate of 14.8%.
The PSA rate of 14.8% applies to the total taxable value of the items to be included under the agreement. The taxable value is calculated by deducting the amount that has been paid back to the employee from the full amount of the expense or benefit. This value is then multiplied by the PSA rate to give the amount of tax and NICs that needs to be paid by the employer.
Items included under PSA:
Employers can include certain expenses or benefits under the PSA, such as:
1. Entertainment expenses – such as client entertaining, staff parties, and gifts
2. Incidental expenses – such as small items of expenditure
3. Non-taxable expenses – such as expenses relating to travel and subsistence
4. Benefits-in-kind – such as company cars, private medical insurance, and mobile phones.
Benefits of PSA:
The PSA has several benefits for employers. By using a PSA, the employer can avoid having to report and deduct tax and NICs from the individual employee`s pay. This can save the employer time and money in administering the individual tax affairs of their employees, as well as reducing the potential for errors in calculating tax and NICs on these items.
Furthermore, the PSA has a positive effect on the employee`s morale as they are not required to pay any extra tax or NICs for the items included under the PSA.
In conclusion, with the new financial year comes new changes for employers in England and Northern Ireland as they need to update their PSA calculations. Therefore, it`s essential for all employers to learn how to calculate their PSA`s in line with the new changes and ensure their employees are not overburdened with additional tax and NICs. By doing so, employers can enjoy the benefits of the PSA, such as saving time and money on administration and improving employee morale.