As we approach significant changes to UK payroll reporting requirements, what does the future hold for PAYE Settlement Agreements (PSAs). With HMRC’s announcement of mandatory payrolling for benefits in kind (recently delayed to April 2027), it’s crucial to understand how these changes will affect existing PSA arrangements and whether they’ll still be a viable option for employers.
What are PAYE Settlement Agreements?
A PAYE Settlement Agreement (PSA) allows employers to make one annual payment to cover all the tax and National Insurance due on minor, irregular or impracticable expenses or benefits for their employees. This system has been a cornerstone of UK employment tax administration for decades, enabling employers to simplify their reporting obligations while covering the tax liability on behalf of their employees.
Key features of PSAs
PSAs are designed to handle three specific types of benefits and expenses:
- Minor benefits: Small-value items like gifts, vouchers, or rewards
- Irregular benefits: One-off payments such as relocation expenses exceeding £8,000
- Impracticable benefits: Items where individual allocation is difficult, such as shared entertainment costs
If an employer applies for and receives authorisation for a PSA for these items they will not need to complete form PSA1 and pay the relevant grossed up income tax and Class1B NIC
Current PSA process
Once a PSA has been applied for and agreed by HMRC, there is no need to annually apply. This means that once established, PSAs continue year after year unless modified or cancelled.
However, there are certain deadlines, as there are with all HMRC returns. The key deadlines are:
- Application deadline: 5 July following the first tax year it applies to
- Payment deadline: 22 October after the tax year the PSA applies to (19 October if you pay by post)
The 2027 changes
From 6 April 2027, the reporting of most Benefits in Kind (BiKs) for Income Tax and Class 1A NICs purposes will be done through payroll software. This change was announced as part of HMRC’s drive to modernise and simplify the tax system.
The mandatory payrolling of benefits will require employers to:
- Report benefits in real-time: From April 2027, taxable benefits will be reported to HMRC (and Class 1A NIC will be paid) in real time via payroll. This is generally referred to as ‘payrolling’ of benefits.
- Eliminate most P11D forms: With limited exceptions, forms P11D and P11D(b) will no longer be required.
- Process through Full Payment Submissions: The reporting process for BiKs will be through the Full Payment Submission (FPS). This is the same process employers currently use to report salary and other employee details to HMRC.
Although the payrolling of benefits is not mandatory until April 27, employers will be given the opportunity to voluntarily payroll the BiKs from April 2026.
Exceptions to the new rules
Importantly, not all benefits will be subject to mandatory payrolling.
Benefits may still be reported via form P11D and form P11D(b) where they relate to the provision of interest free (or low interest) loans to employees, or the provision of accommodation to employees.
Employment-related loans and accommodation will be mandated to be reported in this way at a later date.
Will PSAs still be relevant after 2026/2027?
The answer is, yes, but in a different form.
Despite the significant changes to benefit reporting, PSAs will likely remain relevant for several reasons:
1. Ongoing flexibility for specific items
PSAs were designed to handle items that are “minor, irregular, or impracticable” to process through normal payroll. Many of these characteristics don’t disappear simply because of new reporting requirements.
Items that remain difficult to allocate to individual employees or calculate in real-time may still be better suited to PSA treatment.
2. Continued administrative benefits
PSAs are an administrative arrangement allowing employers to pay the income tax and NIC on behalf of their employees on certain items, rather than return them as benefits in kind on P11D forms or include them in the payroll.
This core benefit – removing the tax burden from employees – remains valuable regardless of reporting changes.
3. Exceptions and transitional arrangements
The government has acknowledged that certain benefits will continue to require alternative reporting methods. The legislation and processes that are currently in place to exempt digitally excluded customers from reporting through RTI will apply as it does now.
What will change for PSAs?
1. Reduced scope
Many benefits currently covered by PSAs may need to be processed through payroll from April 2027. This could significantly reduce the volume of items suitable for PSA treatment. We await further clarification from HMRC.
2. Enhanced focus on truly impracticable items
PSAs may become more focused on genuinely impracticable items where real-time payroll processing remains difficult or impossible.
3. Potential process modifications
HMRC may need to adjust PSA processes to align with the new digital reporting requirements, though specific details haven’t been announced yet.
Practical Implications for Employers
If you are already using PSA’s you should;
- Review your current arrangements to assess which items in your existing PSA might be suitable for payrolling and which should remain in the PSA.
- Evaluate your current payroll systems and processes to determine their readiness for the upcoming changes.
- Be prepared for the fact that the 2025 to 2026 tax year will be the last year that they will accept P11Ds and P11D(b)s for annual reporting in most cases.
If you are an employer not currently using PSAs, you should consider whether a PSA might be beneficial for items that will remain difficult to payroll in real-time, even after the 2027 changes.
Challenges and considerations
Administrative complexity
While the administrative burden of P11D’s is reduced at year-end, the payrolling of benefits in real-time increases the monthly administration for employers as the calculations for BIKs in each pay period will fall on the employer.
Transition period concerns
There are valid concerns about the transition period. Employees who receive a P11D for 2025/26 may be impacted by a double tax hit, with tax code adjustments from the prior year overlapping with the payrolled benefits from 2026/27.
System requirements
Many employers will need to upgrade their payroll systems to handle the increased complexity of real-time benefit reporting.
Recommendations for employers
Short-term Actions (2025-2026)
- Maintain current PSAs: Continue with existing PSA arrangements for the 2025-26 tax year, as this will be the last year under the current system.
2. Prepare for change: Begin planning for the transition to mandatory payrolling by:
- Reviewing current benefit offerings
- Assessing payroll system capabilities
- Identifying items that might remain suitable for PSA treatment
Stay Informed: Keep yourself updated with the latest developments and guidance from HMRC regarding the mandatory payrolling of benefits-in-kind.
Long-term Strategy (2027 onwards)
1. Hybrid Approach: Consider a hybrid model where easily payrollable benefits are processed through payroll, while truly impracticable items remain in a PSA.
2. Regular Review: Establish a process for regularly reviewing benefit arrangements to ensure optimal tax efficiency and compliance.
3. Professional Advice: We are here at Ascend to hold your hand and guide you through the benefit-in-kind changes.
PSAs will likely remain relevant after 2026/2027, but their role will evolve significantly. While the scope may be reduced as more benefits move to real-time payroll reporting, PSAs will continue to serve their core purpose for items that are genuinely minor, irregular, or impracticable to process through normal payroll systems.
The key for employers is to prepare for a more nuanced approach to benefit reporting, where different types of benefits are handled through the most appropriate mechanism – whether that’s real-time payrolling, traditional P11D reporting (for the limited exceptions), or PSAs for truly impracticable items.
As HMRC continues to refine the implementation details, staying informed and flexible will be crucial for maintaining efficient and compliant benefit reporting arrangements. We will continue to provide updates as HMRC release further information and guidance.
