What items can and cannot be included in a PAYE Settlement Agreement?

Under HMRC rules, expenses and benefits must satisfy at least one of three statutory tests: (1) Minor (e.g. staff incentive gift vouchers, small gifts for personal milestones, late-night taxis outside statutory exemptions); (2) Irregular (e.g. annual staff parties exceeding the £150 annual exemption, occasional corporate tickets, relocation expenses exceeding the £8,000 threshold); or (3) Impracticable (e.g. shared staff transport or entertainment where allocating specific costs per employee is disproportionately difficult). You CANNOT include cash wages, regular salaries, major benefits like company cars or mobile phones, or round-sum allowances.

Why does the employer have to 'gross up' the Income Tax?

When an employer pays an employee's tax liability under a PSA, that tax payment is itself treated by tax law as an additional taxable benefit provided to the employee. To account for this tax-on-tax effect, HMRC requires the benefit to be grossed up at the employee's marginal Income Tax rate. For a basic rate (20%) taxpayer, the grossed-up value is Benefit / (1 - 0.20), creating a 25% tax surcharge. For a higher rate (40%) taxpayer, it is Benefit / (1 - 0.40), creating a 66.67% surcharge. For additional rate (45%) earners, the formula is Benefit / (1 - 0.45), creating an 81.82% surcharge.

What is Class 1B National Insurance and what rate applies in 2026/27?

Class 1B National Insurance is a special statutory employer-only contribution created under Section 10A of the Social Security Contributions and Benefits Act 1992 (SSCBA 1992). It replaces Class 1 or Class 1A contributions on PSA benefits. For the 2026/27 tax year, Class 1B NIC is charged at the employer secondary rate of 15.0%. Crucially, Class 1B is calculated on the COMBINED total of the benefit value PLUS the grossed-up Income Tax payable under the agreement. Employees pay zero Class 1B contributions.

What are the key HMRC deadlines for applying and paying a PSA?

There are three critical statutory deadlines for a PSA: (1) Application / Amendment: You must apply for a PSA (Form P626) with HMRC by 5 July following the end of the relevant tax year (e.g. 5 July 2027 for the 2026/27 tax year). (2) Calculation Submission: Submit calculations by the deadline HMRC specifies for the agreement; do not assume 31 August is a universal statutory deadline. (3) Payment: Cleared electronic payment must reach HMRC Accounts Office by 22 October (or 19 October if paying by postal cheque). Late payments incur statutory HMRC interest and late payment penalties.

How does a PSA differ from the £50 Trivial Benefits exemption?

Under Section 323A of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003), trivial benefits costing £50 or less (including VAT) are 100% tax-free and exempt from all reporting, provided they are not cash or cash-vouchers, not contractual, and not given in recognition of work performance. If a perk meets the trivial benefit criteria, it requires neither P11D reporting nor PSA inclusion. A PSA is needed when gifts or entertainment exceed £50 per head, are performance-related (like sales bonuses or long service vouchers), or are cash-vouchers.

Is paying a PSA tax deductible for Corporation Tax purposes?

Yes. The total cost of providing the qualifying staff benefits, along with the grossed-up Income Tax and Class 1B National Insurance paid to HMRC under an approved PAYE Settlement Agreement, is generally treated as wholly and exclusively incurred for the purposes of the trade. It is therefore fully deductible as employment staff costs against trading profits when calculating Corporation Tax liability, subject to general statutory disallowances (such as non-staff client entertaining).

Can Scottish Income Tax rates be applied to a PSA calculation?

Yes. HMRC Form PSA1 requires employers to account for employee tax residences. For employees who have their main residence in Scotland (identified by the Scottish tax code 'S' prefix), the employer must use devolved Scottish tax bands (Starter 19%, Basic 20%, Intermediate 21%, Higher 42%, Advanced 45%, and Top 48%) when grossing up the Income Tax component of the PSA.

Statutory 2026/27 HMRC Form PSA1 Engine

PAYE Settlement Agreement Calculator UK

Calculate employer gross-up Income Tax liabilities and 15.0% Class 1B National Insurance under SI 2003/2682. Model staff parties, gift cards, relocation perks, and Form PSA1 schedules.

Statutory 2026/27 HMRC Form PSA1 Engine

PAYE Settlement Agreement (PSA) Calculator

Calculate employer gross-up Income Tax and 15.0% Class 1B National Insurance under SI 2003/2682.

Tax Jurisdiction:

Select Common Benefit Scenario or Enter Custom Amount:Click any scenario to populate typical values

Total Value of Minor/Irregular Benefits (£)

Enter the gross cost paid by the employer (including VAT) for taxable staff perks to be settled via PSA.

Statutory Class 1B NI Notice

For the 2026/27 tax year, Class 1B Employer National Insurance is charged at 15.0% on both the value of the benefits and the Income Tax gross-up paid on behalf of staff (s.10A SSCBA 1992).

Staff Tax Band Distribution (%)

Total: 100%

Because Income Tax is grossed up at each employee's marginal rate, specify what proportion of the benefit was enjoyed by each tax tier.

Basic Rate (20% Income Tax)50% (£1,200.00)

Gross-up factor: 20/80 = 25.0% tax surcharge

Higher Rate (40% Income Tax)40% (£960.00)

Gross-up factor: 40/60 = 66.67% tax surcharge

Additional Rate (45% Income Tax)10% (£240.00)

Gross-up factor: 45/55 = 81.82% tax surcharge

1. Benefit Value

£2,400.00

Net perk value enjoyed by staff

2. Grossed-Up Tax

£1,136.36

Effective gross-up rate: 47.3%

3. Class 1B NIC (15.0%)

£530.45

On benefit + tax (£3,536.36)

4. Total Employer Cost

£4,066.82

PSA liability: £1,666.82

HMRC Form PSA1 Calculation Schedule (2026/27)

Employee Tax Band	Benefit Proportion	Statutory Gross-Up Formula	Tax Payable
Basic Rate (20%)	£1,200.00	£1,200.00 × (20 / 80)	£300.00
Higher Rate (40%)	£960.00	£960.00 × (40 / 60)	£640.00
Additional Rate (45%)	£240.00	£240.00 × (45 / 55)	£196.36
Total Income Tax Gross-Up	£2,400.00	Sum of band liabilities	£1,136.36
Class 1B National Insurance	15.0% × (Total Benefit £2,400 + Tax £1136.36)		£530.45
Total PSA Amount Due to HMRC	Gross-up Tax + Class 1B NIC		£1,666.82

Commercial Comparison: PAYE Settlement Agreement vs P11D Reporting

Option A: PAYE Settlement Agreement (PSA)Zero Staff Tax

Employee pays: £0.00 — perk is 100% tax-free in employee hands.
No individual P11D forms required; avoids tax code reductions on payslips.
Employer total cost: £4,066.82 (Benefit + PSA liability of £1,666.82).

Option B: Standard P11D ReportingEmployee Taxed

Employee pays: £732.00 via PAYE tax code deduction (damages staff goodwill).
Employer pays 15.0% Class 1A NIC on benefit alone: £360.00.
Total tax & NIC collected by HMRC: £1,092.00 vs PSA of £1,666.82.

HMRC Statutory Deadlines for 2026/27 PAYE Settlement Agreements

5 July 2027

Application Deadline

Last date to apply for or amend a PSA agreement (Form P626) with HMRC for the 2026/27 tax year.

31 August 2027

Calculation Submission

Recommended date to submit completed Form PSA1 calculations to HMRC to agree payable liabilities.

22 October 2027

Strict Payment Due Date

Cleared electronic payment must reach HMRC Accounts Office (or 19 October if paying by cheque).

How a PAYE Settlement Agreement (PSA) Works

A PAYE Settlement Agreement (PSA) is an annual statutory arrangement governed by Part 6 of The Income Tax (PAYE) Regulations 2003 (SI 2003/2682) and Section 10A of the Social Security Contributions and Benefits Act 1992 (SSCBA 1992). It allows employers to settle the Income Tax and National Insurance liabilities on taxable perks and expenses provided to employees in a single, annual electronic payment to HM Revenue & Customs (HMRC).

Normally, taxable benefits in kind must be reported individually on employee Form P11Ds or taxed through real-time payroll, causing employees to suffer unexpected tax code cuts and reduced take-home pay. A PSA eliminates this administrative friction: the employer absorbs the entire tax burden, protecting staff morale while maintaining full statutory compliance with HMRC.

The Three Statutory PSA Criteria

To qualify for inclusion in a Form P626 agreement, an expense or benefit must meet at least one of HMRC's three statutory conditions:

1. Minor Items: Small incentive awards, retail vouchers, flowers, or gifts for personal milestones outside the £50 trivial benefit threshold.
2. Irregular Expenses: Occasional costs that do not occur regularly throughout the tax year, such as annual summer barbecues exceeding the £150 annual function allowance, or overseas conference partner travel.
3. Impracticable Items: Benefits where allocating individual costs to specific employees is disproportionately burdensome or impractical, such as shared corporate hospitality boxes or staff buffets.

The Statutory Gross-Up Formula Explained

Because the employer pays the employee's Income Tax on the benefit, tax legislation treats this tax payment itself as an additional taxable benefit. Consequently, the benefit must be grossed up so that the net amount remaining after tax equals the original benefit value.

Statutory Gross-Up Formulas (2026/27):

Basic Rate (20%): Tax = Benefit × (20 / 80) = Benefit × 25.0%

Higher Rate (40%): Tax = Benefit × (40 / 60) = Benefit × 66.67%

Additional Rate (45%): Tax = Benefit × (45 / 55) = Benefit × 81.82%

For example, if an employer awards a £1,000 retail voucher to a higher rate (40%) marketing manager, the grossed-up Income Tax due to HMRC is £666.67 (£1,000 ÷ 0.60 = £1,666.67 gross taxable value).

15.0% Class 1B Employer National Insurance

In addition to the grossed-up Income Tax, employers must pay Class 1B National Insurance under Section 10A of the Social Security Contributions and Benefits Act 1992. For 2026/27, the employer secondary Class 1 NIC rate is 15.0%.

A critical statutory trap for payroll managers is that Class 1B NIC is levied on the sum of both the benefit value AND the grossed-up tax:

Class 1B NIC = 15.0% × (Total Benefit Value + Total Grossed-Up Tax)

On the £1,000 higher-rate voucher example, the taxable base is £1,000 + £666.67 = £1,666.67. At 15.0%, the Class 1B NIC liability is £250.00. The employer's total PSA liability payable to HMRC is therefore £916.67, bringing the total cost of the £1,000 voucher to £1,916.67.

Frequently Asked Questions

Clear answers based on official HMRC rules and statutory guidance.

A PAYE Settlement Agreement (PSA) is a formal statutory arrangement under Regulations 105 to 117 of The Income Tax (PAYE) Regulations 2003 (SI 2003/2682) that allows UK employers to make a single annual bulk payment to HM Revenue & Customs (HMRC). It covers the Income Tax and National Insurance liabilities arising from minor, irregular, or impracticable employee expenses and benefits in kind. Crucially, the employer bears the tax burden on behalf of the employees through a statutory gross-up calculation, ensuring employees pay £0 tax and receive no payslip tax deductions or P11D forms.

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Only eligible agreed benefits belong in a PSA

A PAYE Settlement Agreement deals with minor, irregular or impracticable benefits agreed with HMRC. It is not an alternative way to process ordinary salary.

The employer gross-up and Class 1B calculation depend on the correct employee tax rates and benefit allocation. Check the agreement and current submission/payment instructions; not every deadline is a universal statutory date.

Check the rules for your circumstances

Official guidance supports the rules described here; it does not approve or certify this calculator. Confirm dates, eligibility and unsupported cases before making a financial decision.