What is a PAYE settlement agreement (PSA) under section 704 of ITEPA 2003?

A PAYE settlement agreement is an arrangement between an employer and HMRC that allows the employer to make a single payment covering income tax due on certain types of employee earnings, such as minor benefits and small gifts, rather than accounting for that tax through the normal PAYE process each pay period.

How is an employer's tax liability determined under a PSA?

When a PSA is in place, the employer's accountability for income tax on the relevant general earnings is determined by the terms of the agreement itself, not by the standard PAYE regulations. The PSA governs what the employer must pay and when, effectively setting aside normal PAYE deduction rules for those particular items.

Does HMRC have the same powers over PSA payments as over normal PAYE payments?

Yes. Section 704 confirms that HMRC has the same regulatory powers over sums payable under a PSA as it does for sums payable under normal PAYE regulations. This means HMRC can charge interest on late PSA payments and handle repayments in the same way as for regular PAYE liabilities.

What types of employee earnings are typically covered by a PSA?

PSAs typically cover minor or irregular benefits provided to employees, such as seasonal party costs, small vouchers, and occasional taxi fares home after late working. These are items that would be impractical or disproportionate to process through normal payroll on a pay-period-by-pay-period basis.

Income Tax (Earnings and Pensions) Act 2003 section 704

Sums payable by employers under agreements

Section 704 deals with PAYE settlement agreements (PSAs), which allow employers to agree with HMRC to account for income tax on certain employee earnings in a simplified way, outside the normal PAYE rules.

An employer may enter into a PAYE settlement agreement (PSA) with HMRC to settle income tax on certain general earnings of their employees
Under a PSA, the employer's liability and the amounts to be paid are determined by the terms of the agreement rather than by the standard PAYE regulations
HMRC has the power to make regulations governing sums payable under a PSA in the same way as it can for sums payable under normal PAYE rules
This ensures that matters such as interest on late payments or repayments can be dealt with under a PSA just as they would be under ordinary PAYE

Access full legislation.And much more.

By becoming a member, your team gets full access to Tax World research tools and source-backed tax resources.

Become a member