PAYE Settlement Agreements: What to do before the 6 July deadline

With the 6 July 2026 deadline fast approaching, now is the time for employers to review, put in place, or update their PAYE Settlement Agreements for the 2025/26 tax year. The last day to apply is July 5th.

Whilst it’s always good to have a PAYE Settlement Agreement (PSA) in place before the start of a tax year, the last date for applying to HMRC for a PAYE Settlement agreement for the 2025/26 tax year (or for amending an existing one), is actually 5 July 2026.

Why consider a PSA?

A PAYE Settlement Agreement (PSA) can be a useful option for employers who provide minor or occasional benefits that are difficult to allocate to individual employees. It helps simplify things by removing the need for separate reporting to HMRC (such as P11D forms) and prevents employees from facing unexpected personal tax charges.

Typical examples include incentive schemes, small gifts, and staff entertaining. These can often be included in a PSA where they don’t fall under an existing exemption. However, higher-value benefits and cash payments are generally not eligible and would still need to be treated through normal payroll or reporting processes.

What is it?

A PAYE Settlement Agreement (PSA) is a voluntary arrangement between an employer and HMRC that allows the employer to settle the income tax and Class 1B National Insurance on certain benefits and expenses in a single annual payment.

Due to this separate annual settlement with HMRC, the items contained in the PSA do not need to be reported individually on P11D forms or processed through the usual PAYE/NIC routes (where relevant deadlines have not already passed). In turn, employees are not personally taxed on these items or required to report them on their own tax returns.

How does it work?

For employers who do not currently have a PSA in place with HMRC, an application for the 2025/26 tax year must be submitted by 5 July 2026. Any items for which a PAYE liability has already arisen would need to be excluded. However, items that have already attracted a Class 1 NIC liability (but not PAYE) can still be included for tax purposes, although they will remain subject to Class 1 NIC rather than Class 1B NIC.

After application, the following will occur:

Subject to HMRC agreeing the proposed content, a formal an enduring agreement will then be issued to the employer (form P626).

The employer must then collate details of all relevant benefits and expenses and submit calculations of the tax and NIC due to HMRC. Typically, HMRC expect these calculations from the end of July onwards, although there is no statutory deadline for submission.

The key date to keep in mind is 19 October following the end of the tax year (i.e. 19 October 2026 for the 2025/26 tax year), which is the deadline for payment of the tax and NIC due (or 22 October for electronic payments). Delays in submitting calculations and making payment beyond this point may result in the agreement becoming invalid.

Advantages and disadvantages

The administrative benefits, such as removing the need for separate reporting and the employee goodwill created by the employer covering the tax on benefits,are easy to see.

However, the trade-off for the employer is that the tax must be paid on a grossed-up basis, along with Class 1B NIC. This means the overall cost can be significantly higher than the original value of the benefit.