2025/26 PSA Deadline Approaching: Have You Identified the Risks?

With the 22 October 2026 PAYE Settlement Agreement (PSA) payment deadline fast approaching, employers should now be reviewing all benefits, gifts and expenses provided to employees during the 2025/26 tax year.

While a PSA can be an effective way to simplify reporting and improve the employee experience, mistakes in PSA calculations remain commonplace. Errors involving annual functions, trivial benefits, employee tax profiles, and incomplete benefit data can lead to significant underpayments of tax and National Insurance, together with interest, penalties and unwelcome HMRC attention.

Many employers assume their PSA process is straightforward, particularly where the same methodology has been followed for several years. However, our experience shows that historic errors often go unnoticed until identified during an HMRC employment tax review.

A final review before the deadline can help uncover issues, correct inaccuracies, and minimise compliance risks before they become costly liabilities.

In this article, we explain how PSAs work and highlight some of the most common reporting errors that employers continue to make.

Common PSA Errors That HMRC Frequently Identifies

Incorrect Application of Exemptions

One of the most common causes of PSA underpayments is the incorrect application of statutory exemptions.

Annual Functions

The annual function exemption is often misunderstood. To qualify, the event must:

• Be an annual event, such as a Christmas party or Summer BBQ
• Be open to all employees (or all employees at a particular location)
• Cost no more than £150 per head, including VAT and associated costs such as accommodation and transport

A frequent mistake is treating the £150 limit as an allowance. It is not.

If the cost exceeds £150 per head, even by a small amount, the entire benefit becomes taxable. Employers often discover during reviews that events thought to be exempt should have been included within their PSA calculations.

Trivial Benefits

Trivial benefits continue to be an area where employers make errors, particularly where gifts or vouchers are provided throughout the year.

To qualify:

• The benefit must cost £50 or less, including VAT
• It must not be cash or a cash voucher
• It must not form part of a contractual entitlement
• It must not be provided as a reward for services or performance

Common errors include:

• Treating cash payments or expense reimbursements as trivial benefits
• Providing vouchers linked to employee performance or targets
• Ignoring VAT when applying the £50 threshold
• Exceeding the £300 annual cap for directors of close companies

Where these conditions are not met, the exemption is lost and the benefit may need to be reported through payroll, a P11D or included within a PSA.

Incomplete Population Data

Even where benefits are correctly identified, inaccurate employee data can significantly distort a PSA calculation.

Frequent issues include:

• Using England and Wales tax rates for all employees and overlooking Scottish taxpayers
• Failing to identify internationally mobile employees
• Applying National Insurance to employees who are exempt under social security agreements
• Incorrectly estimating the proportion of basic, higher, and additional-rate taxpayers
• Including expenses relating to LLP members or other individuals who are not employees

These errors can result in substantial underpayments or overpayments, particularly where large employee populations are involved.

Missing Benefits and Expenses

Perhaps the most significant risk arises where taxable benefits are simply omitted from the PSA calculation altogether.

Commonly overlooked items include:

• Staff entertainment
• Team meals and departmental events
• Gift cards and vouchers
• Relocation expenses exceeding available exemptions
• Wellbeing and fitness benefits
• Travel and accommodation costs that do not qualify for tax-free treatment
• Long-service awards and staff prizes

Because these costs are often recorded across multiple departments and cost centres, employers may not capture the full benefit population when preparing PSA calculations.

Historic Errors Being Repeated

A particular area of concern is where employers replicate prior year calculations without re-evaluating the underlying treatment.

If an error existed in an earlier year, it is likely to continue until identified, potentially creating several years of cumulative exposure. HMRC reviews regularly uncover historic PSA issues that have been repeated for multiple tax years.

For this reason, employers should periodically review both their methodology and the underlying benefit data rather than relying solely on previous calculations.

Why a Pre-Deadline Review Matters

A review before the 22 October deadline can help employers:

• Identify omitted benefits and expenses
• Validate the use of exemptions
• Test the accuracy of employee population data
• Correct calculation errors before submission
• Reduce exposure to interest, penalties, and HMRC challenge
• Gain confidence that PSA liabilities have been accurately reported

With HMRC continuing to focus on employment tax compliance, a PSA should not simply be viewed as an administrative exercise. It is an important compliance obligation that deserves scrutiny.

How We Can Help

Our Employment Taxes team can assist with:

• PSA health checks and risk reviews
• Identifying benefits suitable for inclusion
• Reviewing annual function and trivial benefit exemptions
• Agreeing or amending PSAs with HMRC
• Calculating annual PSA liabilities
• Preparing submissions to HMRC
• Correcting historic reporting errors
• Managing voluntary disclosures
• Strengthening wider employment tax compliance processes

The PSA deadline is approaching. If you would like confidence that your calculations are accurate and that potential liabilities have been identified before HMRC does, please get in touch with our Employer Solutions team.