Can Employers Pay the Tax on Their Expats' Benefits via a "PSA"?

Context and Challenge

Fenton's position: Employers should treat PSA content for internationally mobile employees as a cross-border tax decision, not a year-end payroll adjustment.

The main challenge with PAYE Settlement Agreements, commonly referred to as PSAs, is that they were built for a UK workforce on a UK payroll. Expat employers use them for overseas payrolls, non-residents, tax-equalised assignees and employees in foreign social security. Common symptoms include:

Expat benefits included in the PSA as a matter of course
A default tax rate that does not fit senior staff
Class 1B NICs paid for employees outside the UK system
Vendor and overseas payroll data arriving after 22 October

Who should read this: UK employers with expatriates, overseas employers with staff working in the UK, payroll managers, reward leads, HR directors, global mobility managers, finance directors and advisers preparing PSA calculations.

Core Finding and Summary

TL;DR

Yes: a PAYE Settlement Agreement (PSA) lets an employer settle the income tax and Class 1B NICs on expat benefits that are minor, irregular or impracticable. Payment is due by 22 October after the tax year (19 October by post), with Class 1B at 15%. For internationally mobile employees, residence, treaty, A1 certificates and tax equalisation must be tested first.

Decision point: Is the item minor, irregular or impracticable, is the employee within UK PAYE and NIC for the period, and have residence, treaty, A1 and tax-equalisation status been confirmed before the 22 October payment?

The Issue

What triggers it Expat benefits are included in a PSA.

Why it matters The PSA may collect the wrong tax, charge Class 1B where no UK NIC is due, and leave no evidence for foreign tax credits.

What decision is needed Decide, item by item and population by population, what belongs in the PSA.

Technical Analysis

What is a PAYE Settlement Agreement and how does it work?

A PAYE Settlement Agreement (PSA) is a voluntary agreement, settled annually, under which an employer pays HMRC the income tax and Class 1B National Insurance contributions (NICs) on certain employee benefits and expenses. The employee pays nothing. The items do not appear on payroll, a P11D or the employee's tax return.

A PSA can only cover items that are:

Minor: small in value, such as small gifts and vouchers.
Irregular: not provided at regular intervals and not a contractual entitlement. HMRC's examples include relocation expenses above the £8,000 exemption, overseas conferences and the expenses of a spouse accompanying an employee abroad.
Impracticable: difficult to value or divide between employees, such as shared cars or staff entertainment.

Wages, cash payments such as bonuses and round sum allowances, company cars, car fuel and beneficial loans cannot be included.

Key dates:

5 July: the latest date to apply for, or amend, a PSA for the tax year just ended. Extra restrictions apply if the application is made after the tax year has started. An agreed PSA continues until it is changed or cancelled.
22 October: calculate and pay the liability (19 October if paying by post).

Because the employer pays the employee's tax, the tax is grossed up. Class 1B NICs are then charged at 15% on items that would otherwise attract Class 1 or Class 1A NICs, plus the grossed-up tax.

What this means for employers: a PSA is simpler to administer but can cost more than the benefit itself.

What this means for employees: PSA items do not appear in their own UK tax reporting.

Can an overseas employer use a PSA for employees working in the UK?

An overseas employer with a business established outside the UK but that employs people who work in the UK, such as employees on assignment, new hires or expatriates who have relocated, can operate a PSA if that PSA is attached to a UK PAYE scheme. No PAYE scheme means no PSA. Three structures are common:

Own UK PAYE scheme. An overseas employer with a UK presence, or one registered voluntarily, applies for a PSA in the same way as a UK employer.
UK host employer. Where the overseas employer has no UK presence, the UK entity the employee works for may have to operate PAYE under section 689 ITEPA 2003. The PSA sits with that entity's PAYE scheme.
No UK PAYE scheme. The first question is whether PAYE should be operated at all. A PSA is not a substitute for registering.

For employees on a home-country payroll, a PSA suits group items such as offsites, shared transport and catering. Items for one named individual usually sit better in UK or shadow payroll. Short-term business visitors may be covered by an Appendix 4 arrangement, discussed in a separate Fenton Insight.

Professional judgement is required where employer structure, residence and the location of duties interact. HMRC's PSA guidance is written for UK employers with UK payrolls.

Which expat benefits can go in a PSA?

An expat related benefit is usually a benefit or expense that an employer might provide because an employee has moved to, or from, another country, or other working arrangement outside their home location. Many expat employers include some or all of these in their PSA:

Dependant visa costs and the Immigration Health Surcharge
Relocation costs above the £8,000 exemption
Home leave flights
Tax return preparation fees
Temporary accommodation
Destination services, school search and immigration advice for family members

The reasons are practical:

Vendor data arrives late.
Costs are in a foreign currency.
Cost centres sit overseas.
The person receiving the benefit may be a spouse or child, but not necessarily the employee.

HMRC's 2026 call for evidence states that PSAs are intended for items where the value per employee is genuinely difficult to identify. Where both the recipient and the cost are clear, payroll or a P11D should be used. Applied literally, that removes most expat benefits from a PSA. If HMRC turns this into a definitive list of permitted items, current expat practice ends.

Home leave flights under an assignment letter are also usually a contractual entitlement, so they may not be irregular in any event. Before including them anywhere, check whether an exemption applies, such as sections 370–374 ITEPA 2003; home leave, detached duty and relocation reliefs must be applied consistently and not claimed twice for the same cost.

From 6 April 2027, most benefits must be payrolled rather than reported on a P11D. The employee then bears the tax through PAYE, unless the employer agrees to meet it, in which case the benefit must be grossed up.

What this means for employers: many expat items in PSAs today may already fall outside what HMRC considers a PSA is for. Before the next 5 July deadline:

review every item;
move items with a clear recipient and cost into payroll;
record in writing why each remaining item is impracticable; and
budget for the administrative and cash-flow impact of payrolling benefits from April 2027, and for any gross-up where the employer meets the employee's tax.

What this means for employees: an item removed from a PSA becomes taxable on the employee. If the employer grosses it up or tax equalises it, the employer bears that tax cost.

Why PSA calculations go wrong for internationally mobile employees

An internationally mobile employee is one whose work location, tax residence or social security position crosses a border during the tax year. The PSA calculation assumes a UK-resident employee on a UK payroll paying UK NICs. It fails in several places when that is not so.

The default tax rate. Where an employee has no PAYE income tax liability with the employer, HMRC's guidance says to use the employee's first chargeable rate. That assumes a low earner. Internationally mobile employees with no UK PAYE liability are often higher or additional rate taxpayers paid from a home-country payroll.

Residence and reliefs. A UK-resident employee is normally taxed on all employment income, so most benefits are taxable in full. There are exceptions:

Overseas Workday Relief can exempt earnings for overseas duties in the first four tax years of UK residence for qualifying new residents. It must be elected for and claimed through self assessment and is capped at the lower of 30% of qualifying employment income and £300,000.
An employee may be UK resident under the Statutory Residence Test but treaty non-resident.
A non-resident is taxed only on earnings for UK duties, so a benefit relating wholly to overseas duties may not be taxable at all.

The employer often does not know whether a relief applies until the tax return is filed, which is after the PSA has been paid. Getting the PSA right in these cases usually needs specialist help.

Tax equalisation. Tax equalisation does not exclude an employee from a PSA; the test is whether the item is suitable. For tax-equalised employees, tax is already paid by the employer, and HMRC offers modified payroll arrangements, so individual items usually belong in the modified payroll rather than the PSA. A modified payroll can usually be operated on a best-estimate basis, which makes it a practical alternative.

Class 1B and certificates. Where an A1 certificate or certificate of coverage keeps the employee in their home system, no Class 1 or Class 1A liability should arise. Class 1B is charged on the value of PSA items that would otherwise attract Class 1 or Class 1A, and on the total PSA tax. The certificate should remove the item value, but the charge on the PSA tax remains unless the social security coordination rules under which the certificate is issued also take that charge outside UK legislation, and HMRC has not confirmed how this works. The same issue arises where UK NIC starts or stops mid-year, for example when the 52-week period ends or a certificate expires, because a PSA is an annual settlement.

Dual payrolls and foreign tax credits. Where an employee is on two payrolls, the PSA settlement rarely aligns with the overseas settlement. The employer then funds tax in both countries before any credit is obtained. Foreign tax authorities also often ask for a UK tax return as evidence of UK tax paid. PSA tax does not appear on the return, so that evidence does not exist.

Practical controls for PSAs with expat employees, and Fenton's submission to HMRC

A PSA review is an annual check of which items, and which employees, belong in the agreement. Practical controls:

Map the population before 5 July: residence, treaty position, payroll, PAYE scheme and social security status.
Review each expat item and record why it is minor, irregular or impracticable. Move items with a clear recipient and cost into payroll where workable.
Split the calculation. Calculate UK-resident, non-resident and certificate-covered groups separately rather than applying one rate to one line.
Set vendor deadlines ahead of 22 October in relocation, immigration and overseas payroll contracts.
Check every PAYE scheme, including modified schemes, and confirm which items and people fall under each PSA.
Issue tax statements. Give employees a written statement of UK tax settled under the PSA. It is a useful record, but PSA tax is the employer's own liability and many foreign tax authorities will not accept it as creditable tax of the employee.

Fenton's submission to HMRC. Fenton International submitted evidence to HMRC's PAYE Settlement Agreements call for evidence (23 June to 15 September 2026). It set out why the PSA rules, as currently designed, do not work for internationally mobile employees. We asked HMRC:

whether non-residents and overseas duties can be excluded from a PSA rather than included and reclaimed later;
how A1 or reciprocal agreement cover is treated for Class 1B, and what evidence is needed;
how the PSA gross-up should interact with a tax-equalisation settlement;
whether a later deadline is possible where overseas data dependencies exist;
whether one PSA can cover multiple PAYE references in a group, including modified schemes; and
whether any definitive list of PSA-eligible items will be consulted on separately with global mobility input.

We also proposed an Appendix 7C arrangement for employer-funded voluntary Class 3 NICs . No current mechanism, including a PSA, handles these well.

Case Scenario: Tax-Equalised US Assignee and a UK PSA

Situation: A US company seconds a senior engineer to its UK subsidiary for three years. She stays on US payroll and is tax equalised, and the UK subsidiary operates PAYE for her. The company pays:

her spouse's visa and Immigration Health Surcharge;
her home leave flights; and
her tax return fees.

It also hosts a London offsite for staff from eight countries. Payroll proposes putting everything in the PSA.

Issue: Which items belong in the PSA.

Analysis: Her items each have an identifiable recipient and cost, and the flights are a contractual entitlement. As she is tax equalised, the employer already pays her UK tax, and HMRC offers a modified payroll covering her income. The offsite fits the PSA model, but attendees include non-residents and certificate-covered employees.

Outcome: Her items went into a modified payroll on a best-estimate basis. The offsite stayed in the PSA, with non-resident and certificate-covered attendees identified separately and their treatment documented.

Lesson: Decide PSA content by population and by item before 5 July, not at the October calculation.

Fenton International's Advisory Position

Technical position	Any employer with a UK PAYE scheme can use a PSA to settle income tax and Class 1B NICs on minor, irregular or impracticable items, including for internationally mobile employees.
Professional judgement required?	Yes. HMRC's PSA guidance does not directly address non-residents, treaty non-residents, A1-covered employees or overseas payrolls.
Main risks	Tax risk (overpaid or underpaid), payroll risk, social security risk (Class 1B where no UK liability exists), cost risk, evidence risk (no foreign tax credit evidence), governance risk.
Evidence needed	Residence and treaty position, A1 or certificate of coverage, PAYE scheme map, tax-equalisation status, vendor invoices, written rationale for each PSA item.
Recommended controls	Population map before 5 July, item-by-item review, modified payroll for tax-equalised employees, vendor deadlines ahead of 22 October, split calculations, employee tax statements.

Professional Judgement & Advisory Application: A PSA is largely mechanical for a domestic workforce. It stops being mechanical once residence, reliefs, treaties, social security certificates or overseas payrolls are involved, and HMRC's guidance does not answer those questions.

Fenton International's judgement and recommendation: Review PSA content for internationally mobile employees before 5 July. Separate items with an identifiable recipient and cost from genuine group items. Use a modified payroll for tax-equalised employees. Calculate and document each population on its own facts. The outcome is a PSA that collects the right tax, can be defended if HMRC tightens the rules, and gives employees a record of UK tax settled under the PSA.

FAQs

Can an overseas employer have a PAYE Settlement Agreement?

Yes, if it operates a UK PAYE scheme. A PSA is agreed with HMRC for a specific PAYE scheme, so an overseas employer registered for UK PAYE can apply in the same way as a UK employer, by 5 July after the tax year. Where a UK entity operates PAYE as host employer instead, the PSA sits with that UK entity. A PSA cannot be used to avoid registering for PAYE where registration is required.

Can relocation costs and home leave flights go in a PSA?

Sometimes, but it is becoming harder. HMRC's guidance lists relocation expenses over £8,000 as an irregular item, but irregular items must also be ones employees have no contractual right to. Home leave flights promised in an assignment letter are usually a contractual entitlement. In its 2026 call for evidence, HMRC also stated that where the recipient and cost are clear, payroll or a P11D should normally be used. Document why each item qualifies before including it.

Do Class 1B NICs apply to an employee with an A1 certificate or certificate of coverage?

The NIC position needs testing. Class 1B NICs in a PSA are a UK employer charge on the value of items that would otherwise attract Class 1 or Class 1A, and on the total PSA tax. Where an A1 certificate or certificate of coverage keeps the employee in their home country's social security system, no UK Class 1 or Class 1A liability should arise, which should remove the item value from Class 1B. The charge on the PSA tax remains unless the social security coordination rules under which the certificate is issued also take that charge outside UK legislation. HMRC has not confirmed how this exclusion works in PSA calculations. Fenton has asked HMRC to clarify it and what evidence employers should hold.

Can a PSA be used to pay an expat's voluntary National Insurance contributions?

No, not in any practical sense. A PSA settles income tax and employer Class 1B NICs on minor, irregular or impracticable items. Voluntary Class 3 contributions are the employee's own contribution, cost £957 a year in 2026/27, recur annually and can be attributed to a named person. Employer-funded Class 3 is therefore taxable earnings, usually grossed up through payroll. Fenton has proposed a dedicated Appendix 7C arrangement to address this.

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About the Author

Mark Abbs

CEO, Fenton International

Fellow of the Association of Taxation Technicians (FATT)
Enrolled Agent of the IRS (EA)
Global Mobility Specialist – Talent Strategy (GMS-T®)

32+ years' experience in international tax, cross-border employment tax and global mobility. Advises CFOs, HRDs and Chairs on cross-border tax governance.

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