What is the background?
One method that employers can use to help them motivate and incentivise employees is by providing gifts or staff events which can also help to improve morale and increase goodwill. With the easing of Covid restrictions, more employees are receiving gifts and staff events have gradually been re-introduced, however, it is important to consider the tax consequences of those items and in a lot of cases they are taxable and liable to NI. There are some valuable tax exemptions available, but in broad terms if they are taxable the cost should either be:
- Processed through the payroll;
- Shown on an employee’s P11D; or
- Included on a PAYE Settlement Agreement (PSA).
What is the issue?
The key question employers need to consider is who should pay the tax and NI liability; themselves or their employees. There are four potential ways in which the issue may be dealt with:
- Process the costs of the items via the payroll (or P11D submission process) and let the employee pay the tax liability that is due;
- Process the costs of the items via the payroll (or P11D submission process) and pay the employee a taxable bonus through payroll to cover their tax liability;
- Process the costs of the items via the payroll on a grossed up basis, such that the employer bears the tax and NI cost;
- Include the costs of the items on a PSA and pay the tax and Class 1B NI on a grossed up basis.
There are pros and cons with each of the options, with the decision as to which to take including the impact on the employee and the potential extra costs for the employer of grossing up the cost of the benefit. For example, in option 1, if after attending a social event arranged by their employer the employee receives an unexpected tax bill, it would be understandable if their view of their employer would be negatively impacted as they will have to pay their own tax liability.
What is a PSA?
Most employers in these type of situations will use a PSA to meet the tax liability on behalf of their employees. The key attraction for employers of using a PSA is there is no impact on the employee at all. It can also be less of an administrative burden, as there would no requirement to utilise either of the payroll or P11D submission processes. However, this option can be more expensive as the tax and NI due on the benefit is calculated on the grossed-up basis based on the employee’s marginal tax rate. This equates to an effective rate for a 40% taxpayer of around 90% of the cost.
The key requirements for a PSA is that the benefit must be either:
- A minor benefit; as regards the size or type of benefit.
- An irregular benefit; as regards the frequency or times at which the benefit is provided.
- One where it is impractical to apportion the benefit between employees – this may be the case in respect of staff entertaining.
The key dates relating to a PSA are as follows:
- Items to be included in the PSA to be agreed with HMRC by 6 July after the end of the tax year in which the benefits are provided;
- Calculation to be sent to HMRC by 31 July after the end of the tax year in which the benefits are provided; and
- Tax and Class 1B NIC liability to be paid by 19 October after the end of the tax year in which the benefits are provided (or 22 October if paying electronically).
What do employers need to consider if they are using the PSA approach?
Employers need to ensure they:
- Have an agreement in place with HMRC by the deadline;
- Review and interrogate their finance ledgers to identify any items that need to be included;
- Exclude those items that are eligible for a tax exemption and be able to explain their view to HMRC;
- Use appropriate tax rates for their calculations, including Scottish Tax rates for any Scottish employees;
- Review earlier years to see if they have any issues; and
- Consider whether tax costs need to be recharged between different parts of the business.
How can UNW help?
Before choosing how to deal with those taxable benefits, employers need to ensure they are applying the correct tax exemptions and are not overpaying tax and NI. Our employment tax specialists have expertise in analysing expenses to identify taxable staff entertaining, gifts and agreeing PSAs with HMRC. They regularly undertake reviews for clients to ensure they are adopting the correct approach and are declaring the correct amounts on their PSA.
As well as helping employers to set up PSAs we also undertake annual PSA reviews which typically proceed as follows:
- Examination of appropriate finance ledgers;
- Identification of items potentially eligible for tax exemptions;
- Calculation of tax and NI liabilities; and
- Submission of the completed calculations to HMRC.
If you would like more information about this, or any other employment tax related matters please contact:
Employment Taxes Partner
T: 07810 852 362
Employment Taxes Senior Manager
T: 07392 870 199