You took the team out for a summer party, gave a few staff vouchers to mark a good quarter, and covered some relocation costs that ran over the exempt limit. Now you have a handful of small taxable perks from the 2025-26 tax year and no clean way to report them. A PAYE Settlement Agreement is how you settle the tax on all of them in one payment. To use it for 2025-26 you need it in place with HMRC by 5 July 2026.
TL;DR: A PAYE Settlement Agreement (PSA) lets an employer pay the income tax and Class 1B National Insurance on minor, irregular, or impracticable staff benefits in a single annual payment, so the perks stay tax-free for employees. You must agree a PSA for 2025-26 by 5 July 2026, then pay by 22 October 2026 (electronic). Class 1B NIC is 15%.
What Is a PAYE Settlement Agreement?
A PSA is a voluntary arrangement with HMRC that lets you, the employer, pay the income tax and National Insurance on certain employee benefits yourself, in one annual settlement, rather than reporting each one on a P11D or putting it through payroll. The employee gets the perk with no tax to pay and nothing landing on their own tax return.
The catch is that you pay the tax on a grossed-up basis, then Class 1B National Insurance on top. So a PSA buys simplicity and goodwill, not a tax saving. What we see most often is employers using it for the things that would look mean-spirited to tax on the staff member: a long-service gift, a team celebration, a one-off welcome cost for a new hire.
What Can Go on a PSA - and What Can't
HMRC allows three categories onto a PSA: minor, irregular, and impracticable items (GOV.UK, 2026). Minor covers small gifts, vouchers, and staff entertainment that falls outside the trivial benefits rules. Irregular covers one-off costs not paid at set intervals, such as relocation expenses above the £8,000 exempt amount or attendance at an overseas event. Impracticable covers shared benefits with no clean per-person value, like a staff party split across the workforce.
Some things cannot go on a PSA. Cash earnings, salary, round-sum allowances, company cars, and fuel all stay on payroll or the P11D. Anything already exempt does not need a PSA at all: a trivial benefit under £50 and an annual function up to £150 per head are tax-free in their own right (GOV.UK, 2026). One question clients always ask is whether they can sweep a director's regular benefit onto a PSA to tidy things up. They cannot, because it is neither minor nor irregular.
When Are the PSA Deadlines for 2025-26?
To cover benefits provided in the 2025-26 tax year, your PSA must be agreed with HMRC by 5 July 2026 (GOV.UK, 2026). Miss that window and you cannot put 2025-26 items on a PSA at all, so they revert to P11D reporting or payroll, with the tax landing on your employees instead.
Payment of the tax and Class 1B NIC follows later: it must reach HMRC by 22 October 2026 if you pay electronically, or 19 October 2026 by post. Since April 2018, PSAs have been enduring agreements (CIPP, 2025). Once one is in place it rolls forward automatically each year, so you only go through the setup once and then vary or cancel it if your benefits change. In our experience that is the part most employers miss: they assume they have to reapply annually and waste time doing so.
How Much Does a PSA Cost to Settle?
More than the face value of the benefit, because you gross up the tax and add National Insurance. The tax is calculated at each employee's marginal rate, so a benefit to a higher-rate (40%) employee costs more to settle than the same benefit to a basic-rate (20%) one (GOV.UK, 2026). The grossing-up formula is the benefit value multiplied by the rate, divided by one minus the rate.
Take a £10,000 overspend on a staff event shared among higher-rate employees. The grossed-up tax is £10,000 x 40/60, which is £6,666.67. Class 1B National Insurance is charged at 15% on the benefit plus that tax, so 15% of £16,666.67, which is £2,500 (GOV.UK, 2026). The total PSA settlement is £19,166.67 on a £10,000 perk. Note that Class 1B rose from 13.8% to 15% on 6 April 2025, so the cost is higher than it was two years ago. Scottish taxpayers use the separate Scottish rate bands, which HMRC requires you to compute separately.
Should You Use a PSA or Payroll the Perk?
It depends on whether you want the employee to feel the tax. A PSA keeps the benefit tax-free for staff but costs you the grossed-up tax and NIC. Payrolling the benefit, or reporting it on a P11D, passes the income tax to the employee and leaves you with Class 1A National Insurance at 15% instead of Class 1B.
For a genuine thank-you, the PSA route protects the gesture: nobody wants a £40 voucher to show up as a tax deduction on a payslip. For routine, contractual, or higher-value benefits, payrolling is usually cheaper and cleaner, and it fits the direction of travel now that mandatory payrolling of benefits is coming. The decision is rarely about the maths alone. It is about which benefits you want to feel like a gift.
Why Employers Miss the Window
The 5 July deadline sits in the same fortnight as the 6 July P11D deadline, the P11D(b) Class 1A return, and the start of the summer holidays. Payroll teams focused on P11Ds often forget the PSA is a separate agreement with its own clock. By the time someone remembers the staff party, the window has closed and the cost has quietly shifted onto employees.
Frequently Asked Questions
Do I have to reapply for a PSA every year?
No. Since April 2018, PSAs have been enduring agreements that roll over automatically each tax year. You only set one up once. You then contact HMRC to vary it if the benefits you want to include change, or to cancel it if you no longer need it. You do still have to calculate and pay the settlement each year by the October deadline.
What is the Class 1B NIC rate for a PSA?
Class 1B National Insurance is 15% for both 2025-26 and 2026-27, up from 13.8% before 6 April 2025. It is charged on the total value of the benefits in the PSA plus the grossed-up income tax. There is no employee National Insurance on PSA items, because the employer settles everything in one payment.
Can I put a staff Christmas party on a PSA?
Only the part that is not already exempt. An annual function such as a Christmas party is tax-free up to £150 per head per year. If you spend more than £150 a head, the whole cost for those staff becomes taxable, and that excess can go on a PSA so employees are not taxed on it. If you stay under £150 a head, you do not need a PSA for it at all.
What happens if I miss the 5 July deadline?
You cannot put that tax year's benefits on a PSA. They revert to the normal routes: payroll or a P11D, with the income tax falling on the employee rather than on you. There is no extension, so if any benefit is time-sensitive it is worth agreeing the PSA early rather than leaving it to the first week of July.
Not sure which staff perks belong on a PSA and which should stay on payroll? Talk to our team - we'll review your 2025-26 benefits, work out the settlement cost, and get the agreement in place with HMRC before the 5 July deadline.