PSA1160 - Overview of PAYE Settlement Agreements

In calculating the amounts to be paid under a PSA you and the employer 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 NICs liability
  • grossed-up tax payable in the PSA, and Class 1B NICs in respect of that tax
  • rate of Class 1B NICs which should be used to calculate NICs liability.

Although there is a legal framework for detailed calculation of the tax payable, it is open to the employer and yourself to agree for each item involved a method of calculation which is efficient to you both. It is intended that, where you consider it prudent to do so, the method of calculation will strike a balance between

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

You may agree with the employer that the amount of tax payable under a PSA in relation to a large number of employees can be calculated by reference to a representative sample of the employees concerned. Employees should be apportioned accordingly to their marginal rate of 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 PSA calculation purposes.

The calculation of Class 1B NICs will utilise the figures calculated for tax purposes but will take into consideration that some items included in the calculation might not attract a NICs liability e.g. childcare. Remember that Class 1B NICs is also due on the total tax payable under the PSA.

The PSA calculator on SEES will calculate the tax and Class 1B NICs due under a PSA for you from 2008-09 onwards. You can then print off the calculation and send it to the employer.

Effects of VAT

The amount to be included in a PSA should include the full amount of VAT paid, whether or not the employer may subsequently reclaim all or part of it.