There is no smoke without fire. Does the recently announced Call for Evidence on PAYE Settlement Agreements suggest that changes to the process, or more importantly to how it operates in practice, are in the pipeline?
What is the background?
A PAYE Settlement Agreement (PSA) is a voluntary arrangement between an employer and HMRC. It allows the employer to settle, on behalf of its employees, the income tax and National Insurance contributions due on certain benefits and expenses.
A PSA provides an alternative to reporting those items through payroll or the P11D expenses and benefits reporting process. The employer pays the grossed-up tax and Class 1B National Insurance contributions instead of the employee bearing the tax through payroll or their tax code.
PSAs are intended for items that are minor, irregular or impracticable to process through the normal reporting routes. They are used widely by employers of different sizes and across a range of sectors. Larger employers will often use technology to collate data and prepare calculations, while smaller businesses may rely on a more manual process.
The Government has issued a Call for Evidence on PAYE Settlement Agreements. It gives employers an opportunity to influence future policy and administrative practice. The response window closed on 15 September 2026, with a summary of responses expected later in the year. If changes are proposed after that, a further consultation may follow.
What are the issues?
The Call for Evidence suggests that PSAs may sometimes be used more widely than originally intended. Its general principle is that, where both the employee receiving a benefit and the associated cost can be identified, the benefit should normally be reported through the standard expenses and benefits reporting process. This would mean reporting on form P11D or, where the employer is registered, through voluntary payrolling of benefits in kind.
Costs attributable to a large number of employees, such as the cost of a meal at an event, may remain suitable for a PSA. However, benefits or costs attributable to individual employees may face greater scrutiny. If this approach is applied more strictly, some employers will need to reconsider which items they include in their PSA and how any change is communicated to affected employees.
The Call for Evidence also considers how tax-free trivial benefits should be distinguished from items included in a PSA, whether the current contractual PSA process could be replaced by a voluntary compliance framework, and how benefits provided to employees who do not pay income tax should be treated within PSA calculations.
This review also sits alongside the move towards mandatory payrolling of benefits in kind. Employers will increasingly need robust processes to identify taxable benefits and report them through payroll, as the scope to correct matters through the year-end P11D process will reduce. At the same time, cost pressures are encouraging employers to examine whether statutory exemptions apply rather than automatically including expenditure in a PSA.
What do employers need to do now?
Employers should not wait for the outcome of the Call for Evidence before reviewing their arrangements. Practical steps include:
- Review the items currently included in the PSA and identify any that relate to named individuals or costs that can readily be attributed to individual employees.
- Check whether any items could instead be covered by a statutory exemption, including the trivial benefits exemption, and retain evidence supporting the treatment adopted.
- Assess whether items may need to be reported on forms P11D or through payrolling of benefits in kind if HMRC adopts a narrower interpretation of what is suitable for a PSA.
- Review data collection, payroll and finance processes in preparation for mandatory payrolling of benefits in kind.
- Plan how any future change in treatment would be communicated to employees, especially where employees could become personally liable for tax on benefits previously settled by the employer.
How UNW can help
UNW’s award-winning employment tax team provides a wide range of practical support to employers, including:
- Reviewing existing PSA arrangements and assessing whether items remain suitable for inclusion.
- Providing hands-on support with PSA calculations, including the use of technology for larger PSAs.
- Preparing and submitting P11D and P11D(b) returns.
- Advising on exemptions and alternative reporting treatments for expenses and benefits.
- Supporting employers with the move towards payrolling of benefits in kind.
- Facilitating employment tax training workshops, including bespoke sessions tailored to an employer’s needs.
UNW’s employment tax team has significant experience on employment tax matters and if you would like to discuss how we can help you, or have any other employment taxes related queries, please get in touch with us at employmenttaxesteam@unw.co.uk
