If you were looking for the video by Robin Thicke and found my blog, I apologise profusely!

However, if you wanted an overview of PAYE Settlement Agreements and how these compare with P11Ds in terms of tax and national insurance exposure you have come to the right place.

Although infinitely more costly to an employer (I will demonstrate in a worked example below), PAYE Settlement Agreements can be an excellent means of reporting the smaller benefits made available to your employees.  The three categories of benefit found in HMRC’s non-statutory guidance SP 5/96 provides advisers with the most simplistic overview of what a PSA should cover.  However, when do normal benefits in kind become minor, irregular or impracticable? The simple answer is, there is no definitive answer.

In practice, I have more commonly seen gym memberships paid by an employer on behalf of employees declared at Section M on a P11D form but within SP 5/96 this is categorised as a potentially minor benefit.

My general feeling is that employers and to a lesser extent tax advisers themselves should not become entrenched in trying to distinguish whether a benefit should be included on a P11D or a PSA.  Moreover, employers need to question whether they would want their employees to have the inconvenience paying tax on such items as the Christmas party or perhaps their long service award.  Not only would they be incurring tax and national insurance liabilities but they would also have to monitor PAYE tax codes issued by HMRC and ensure that the benefits appeared on their SA Tax Returns.  This could result in employees heading for the exit and into the bosom of their friendly recruitment agent!

As stated in my introduction above, I wanted to provide a worked example showing the difference in tax and national insurance exposure.  Let’s assume an employer has a Summer function at Ascot and a Christmas party on a riverboat.  The cost of the Ascot trip is £175 per head and the Christmas party £124 per head.  There are twenty staff of which twelve are higher rate and eight basic rate.

Under S. ITEPA 2003 the Christmas party is covered by the £150 per head exemption for staff functions.  However, the more expensive event at £175 per head will be fully chargeable to tax and national insurance.

The cost needs to be grossed up by reference to the marginal rate of tax each group of employees are paying, which after crunching the numbers, shows that £1,750 worth of tax is payable by the Company.  The Class 1B National Insurance can then be calculated on total grossed up value of the benefit for both groups of employees and this works out to be £724.50. Consequently, the total amount due under the PSA is £2,474.50 and the employees need never know that their wonderful staff function has cost the firm an arm and a leg in tax!

Now for the alternative.

If each employee were to have the Ascot trip included within a P11D, there would be tax of £1,120 payable, with an NIC liability of £483.

This means that the difference between settling the tax and NIC through PSA and having the tax paid by the employee without grossing up is £871.50.  The bigger the numbers, the more noticeable the difference.

The Office of Tax Simplification report published in January this year included a proposal to extend the breadth of items that can be included within a PSA to pretty much anything that the employer wishes without prior approval from HMRC.  However, as you can see from the above example, the difference in costs can be considerable and the tax burden where there are larger benefits in play even more considerable.