Don’t let Christmas party costs trip up your PAYE Settlement Agreement (PSA)

With Christmas approaching, many businesses are planning festive celebrations and staff gifts. But there’s one tax requirement that often gets overlooked until it’s too late: the PAYE Settlement Agreement (PSA).

A PSA allows employers to make one annual payment to cover the tax and National Insurance on certain benefits and expenses given to employees. It simplifies reporting and ensures your team does not face unexpected tax charges.

Unfortunately, it is also an area that can catch businesses out, particularly when seasonal spending exceeds HMRC limits.

What is a PAYE Settlement Agreement?

A PSA is an arrangement with HMRC that lets you pay tax and National Insurance on:

Minor benefits, such as small gifts or staff entertaining
Irregular expenses, such as a one-off staff event
Impractical-to-attribute items where it would be difficult to work out individual amounts

By agreeing a PSA, you take the tax burden away from your employees while staying compliant and avoiding penalties.

Why Christmas parties can cause problems

HMRC allows an annual tax exemption of £150 per head for staff parties. The limit is VAT inclusive and covers food, drink, entertainment, venue hire, and even transport or accommodation.

However, if you go over that limit, even by a few pounds, the full cost becomes taxable. That means:

Tax and National Insurance must be paid on the entire amount, not just the excess
The benefit has to be reported on a PSA, not on individual P11Ds

Many businesses only realise this after the event when their PSA deadline has already passed.

Staff gifts

Employers often choose to provide gifts to staff at Christmas, however this does not have to result in a liability to tax and National Insurance.

There are no tax implications, for the employer or employee, if:

It costs the employer £50 or less to provide (VAT inclusive)
It is not cash or a cash voucher
It is not a reward for their work or performance
There is no contractual requirement to provide

If all these criteria are not met, tax and National Insurance will be due, and the gifts may be reported on a PSA.

Key PSA dates to remember

To keep your PSA stress-free:

5 April – The end of the tax year
6 July – Deadline to apply for or amend a PSA for the previous tax year
31 July – Contractual deadline to submit PSA calculation to HMRC
22 October – Deadline to pay any PSA liability electronically (19 October if paying by post)

Missing these deadlines can mean penalties and interest charges.

How SMH Group can help

Planning a party or staff gifts this Christmas? Our tax team can:

Review your plans and spending to help keep costs within the £150 per head exemption
Identify any other items that need to be included in a PSA
Handle your PSA application and calculation to ensure timely submission and payment

We take the guesswork out of compliance so you can celebrate without a last-minute rush or unexpected tax bill.