The month of October is a busy time for tax professionals in the UK. Managing corporation tax payments, preparing and submitting paper Self-Assessment returns, finalising PAYE and VAT obligations, and ensuring clients meet HMRC registration deadlines can be a perfect storm of compliance hazards.
One of those things that often gets overlooked is the PAYE Settlement Agreement (PSA). This could be down to a number of reasons, chief among them is the lack of immediate impact on daily operations. For tax preparers, this last-minute hustle often leads to managing multiple deadlines, frantic data gathering, and submissions just as firms are already at their busiest.
With the HMRC PAYE Settlement Agreement deadline approaching, staying on time can be the difference between seamless compliance and unnecessary interest charges. Payments can be made by mail by October 19, 2025, and electronically by October 22, 2025.
This blog offers key insights into the PAYE Settlement Agreement concept and serves as a guide to understanding the essential steps to stay compliant without the stress of last-minute deadlines.
What is a PAYE Settlement Agreement (PSA)?
A PSA is essentially an agreement with HMRC that allows an employer to pay taxes and National Insurance on behalf of their employees for certain expenses or benefits. Instead of reporting these items individually for each employee through the regular P11D forms or payrolled benefits, with tax and National Insurance deducted monthly, the employer can settle the liability in a single payment, simplifying administration and reducing the reporting burden.
The process requires the employer to apply for a PSA with HMRC, and the application must be submitted by 5 July following the end of the tax year to ensure it covers expenses and benefits provided in the previous tax year.
What Does a PSA Include?
One reason why PSA gets attention at the last minute by clients is because of the nature of things that are included in PSAs. These are often discovered late, during year-end reviews or after expenses are reconciled, meaning tax experts are scrambling to capture everything accurately. Here are the 3 kinds of items included in the PSA, according to HMRC:
Minor benefits
Minor benefits are small perks provided to employees by an employer, usually low in value and routine. Although each benefit is modest, they can add up across the workforce and are subject to taxation under a PAYE Settlement Agreement.
Examples:
- Incentive awards like long-service recognitions
- Telephone bills
- Small gifts and vouchers
- Staff entertainment
Irregular items
Irregular items refer to unpredictable expenses that an employer pays towards an employee on a one-off or occasional basis. Because they don’t form part of regular payroll, these items are often overlooked in routine reporting. However, they must still be included in the PSA to remain compliant with HMRC rules.
Examples:
- Ad-hoc relocation expenses for employees moving for work
- One-time bonuses or non-cash retention rewards
- Unplanned travel or accommodation costs beyond normal claims
- Short-term allowances for special projects or assignments
Impracticable benefits
Impracticable benefits are those that are difficult to calculate or allocate on an individual employee basis. These typically involve shared costs or large-scale events were dividing the expense fairly among all attendees would be complex. A PSA allows employers to account for these collectively rather than individually.
Examples:
- Large staff parties or annual company celebrations
- Corporate hospitality events, such as client entertainment days
- Team-building activities or group excursions
- Department-wide gifts or shared subscription
How to process PAYE Settlement Agreement with HMRC?
The process of a PAYE Settlement Agreement (PSA) with HMRC revolves around preparing for the October payment deadline. Employers must calculate the total tax and Class 1B National Insurance owed on all PSA-covered benefits and pay HMRC by 19 October or 22 October, depending on the method of payment.
Here’s a step-by-step outline to reach this deadline smoothly:
First, carefully review all the expenses and benefits that are covered under the PSA and ensure that you compile accurate and comprehensive records of these items.
Next, calculate the grossed-up amount of tax and National Insurance contributions that are due, making sure to include all qualifying items such as minor perks, irregular payments, or hard-to-value benefits, as these are often overlooked but essential for accurate tax calculations.
Finally, proceed to make the payment to HMRC using the PSA reference number provided, so that the payment is correctly allocated and recorded against the appropriate account.
Early preparation of these steps reduces last-minute pressure, simplifies administration, and gives employers confidence that their PSA obligations are fully met before the October cut-off.
Importance of PAYE for Start-Ups
Start-ups and small businesses often face unique challenges primarily due to their limited resources and bandwidth. Navigating the complex world of payroll rules and regulations can be overwhelming. For UK-based accounting firms, guiding these clients effectively ensures they stay compliant while focusing on growth.
A PAYE Settlement Agreement (PSA) offers these clients several key benefits that can simplify their processes and provide financial clarity.
It helps them avoid the administrative hassle of submitting multiple P11D forms, making compliance simpler and reducing the risk of errors or penalties.
It also allows businesses to provide attractive perks, like team lunches, seasonal gifts, or other incentives, without creating additional reporting or tax obligations for employees, making offering benefits more appealing and cost-efficient.
Additionally, it supports more precise budgeting and financial planning by combining the tax and National Insurance due on various qualifying benefits into a single, predictable annual payment. Making for an organised approach aids cash flow management and promotes financial stability.
Overall, a PSA acts as a valuable tool for small businesses and start-ups to improve efficiency, maintain compliance, and optimise their employee benefit offerings.
Introducing PSAs early in a client’s growth journey not only streamlines their payroll processes but also positions your firm as a strategic partner. A proactive approach reinforces your value as a trusted adviser who helps clients scale efficiently and stay compliant, fostering long-term relationships and mutual growth.
Penalties in cases of Late Payment
If a PAYE Settlement Agreement (PSA) payment is not made by the deadline, HMRC applies its standard PAYE late payment rules.
Employers who miss the deadline are charged daily interest on the overdue tax and Class 1B National Insurance from the day after the deadline until the payment is cleared. Though the first late payment is ignored when calculating the penalty rate.
In addition, HMRC may impose escalating late payment penalties based on the number of late payments (defaults) made within the same tax year. Here is how the interests are applied depending on the time from the missed deadline:
| Number of defaults in a tax year | Penalty percentage applied to the amount that is late in the relevant tax month (ignoring the first late payment in the tax year) |
|---|---|
| 1 to 3 | 1% |
| 4 to 6 | 2% |
| 7 to 9 | 3% |
| 10 or more | 4% |
Conclusion
Proactively managing PAYE and PSAs demonstrates the value and expertise of an accounting firm. Guiding start-ups and small businesses through the complexities of payroll, ensuring compliance, and helping them take advantage of PSAs, firms can simplify administrative tasks, reduce errors, and optimise employee benefits.
AcoBloom provides comprehensive support to accounting firms across the UK, offering expert guidance, innovative tools, and a wide range of resources to help them operate more efficiently and effectively. Dedicated to empowering accounting professionals, delivers the expertise and solutions needed to navigate complex financial regulations, streamline workflows, and enhance overall pract
