PSAs are optional arrangements that allow employers to include minor or irregular benefits and expenses in a separate return instead of reporting them in form P11D and accounting for Class 1 or Class 1A NICs.
Why use a PSA?
PSAs are popular with employers because they avoid the requirement to complete P11Ds for certain benefits (potentially removing the requirement for P11Ds to be prepared for some employees depending on the benefits provided) and also mean the employee does not bear the tax and NIC cost of the benefit. For example, gifts provided to employees or the provision of staff entertainment are generally liable to tax / NICs (see the Gifts and Entertainment ― staff guidance notes) but are provided by employers as a perk.
The popularity of such gifts and events with the employees would however be diminished if they had to pay tax on the benefit. The PSA passes the tax and NIC liability on these benefits to the employer so the employee receives the benefit free of any tax or NIC.
The mechanics of a PSA
Employees do not pay any tax or NICs, instead the employer agrees to settle the tax on a grossed-up basis and Class 1B NICs with HMRC annually. Class 1B NICs become payable on the relevant items in the PSA instead of Class 1 NICs or Class 1A NICs as appropriate. Class 1B NICs are payable both on the value of the initial benefit and the tax payable under the PSA.
Any benefits and expenses included on a P11D will give rise to a tax charge on the employee unless a claim is submitted to disregard the benefit / expense when calculating the tax / NIC.