As an employer, it’s nice to be able to reward your employees with something special every once in a while, such as a holiday or a hamper, but in the complex world of employee rewards and benefits, understanding the tax implications is crucial for those employers who want to show appreciation to their hardworking staff. You need to be aware of several factors. Why? Because if the value of the reward/benefit exceeds the tax-free amount permitted under the rules for long service awards, trivial benefits or staff suggestions, it will be taxable.
So, How Can You Settle The Tax?
To avoid your employees getting a nasty shock in their pay packet, you can bear the tax and NIC on their behalf under a payroll settlement agreement (PSA) negotiated with HMRC. The PSA procedure can also be used where the value of certain benefits provided to a group of employees, such as taxis home after working late or a staff party, exceeds the exempt amount. Learn more about PSA and what this means for your business below:
What Is A PSA?
A PSA is an arrangement between an employer and HM Revenue and Customs (HMRC) in the UK. It is used when employers want to pay the tax and National Insurance Contributions (NIC) on behalf of their employees for certain taxable benefits and expenses rather than having individual employees pay these taxes themselves.
How Do You Enter A PSA?
When you enter into a PSA, you agree to pay the tax and National Insurance contributions (NIC) that are due on behalf of your employees for specific benefits or expenses. However, to do this, you often need to “gross up” the amount, which means you pay not only the actual tax and NIC but also the additional tax that would be incurred on those amounts (the tax on the tax, essentially). For additional rate taxpayers, the total cost of tax and NIC can be as high as 115% of the value of the benefit provided. This means that if the value of the benefit is, for example, £100, the employer may end up paying £115 in taxes and NIC to cover it.
In the past, when employers wanted to apply for a Payroll Settlement Agreement (PSA) with HMRC, they had to use a physical paper form called P626. However, there has been a recent change, and now employers have the option to complete this application online, making it more convenient and efficient for businesses.
Regardless of whether you use the traditional paper form or the new online facility, HMRC (Her Majesty’s Revenue and Customs) will send you the finalised PSA agreement by postal mail – this agreement is the official documentation outlining the terms and conditions of the PSA.
In addition to the postal mail containing the finalised agreement, HMRC will also send you a confirmation or receipt of your application. This confirmation may be delivered electronically (via email) or through traditional mail (letter) and serves as proof that HMRC has received and is processing your application.
If you intend to set up a PSA for occasional benefits provided to your employees during the tax year 2022-23, there are two important deadlines to keep in mind:
- Application Deadline: You must enter into the PSA agreement with HMRC no later than 5th July 2023. This is the cutoff date for initiating the agreement. Failing to meet this deadline may result in the benefits being subject to regular taxation for your employees.
- Payment Deadline: The tax and National Insurance Contributions (NIC) due under that PSA must be paid by 22nd October 2023. This is the date by which you need to settle the financial obligations associated with the PSA.
Reaping The Rewards
So, a PSA not only simplifies the tax process but also demonstrates your commitment to your employees’ well-being; it’s a practical way to manage your responsibilities as an employer while ensuring your employees receive the full value of the benefits you provide.
By taking this proactive approach, you can foster a positive working environment and strengthen your relationship with your dedicated workforce. So, as you consider ways to recognise your employees’ contributions, remember that settling tax with a PSA is not just a responsible choice but also a considerate one. Your employees will thank you, and so will your bottom line.
If you have any further questions or need assistance with the PSA process, don’t hesitate to contact our knowledgeable team or reach out to HMRC for guidance. Happy rewarding!