A charity may be able to pay tax on behalf of an employee by entering into a PAYE Settlement Agreement (PSA). This is a scheme available to make an annual payment to HMRC for income tax and NICs due on three categories of expense and benefit:

• minor items
• irregular items, and
• items on which it is impractical to operate PAYE or to value for P11D purposes

Under a PSA, the charity will meet the tax cost on behalf of the employee. The tax is therefore grossed up. Class 1B NICs are also payable. This means a PSA can be an expensive option.

The amounts to be included in a PSA must be agreed with HMRC before:

• in the case of items that would otherwise be included on form P11D: 6 July following the end of the tax year to which it relates
• in the case of items on which income tax and Class 1 NICs would be payable: in the tax year of the PSA and before the employers stop deducting income tax and NIC.

The tax and Class 1B NICs are payable by 19 October (or 22 October in the case of some electronic payments) following the tax year to which the PSA relates.

HMRC is considering changes to the PSA system and charities should be aware that the deadlines for agreement of contracts and submission of information may change.