Which tax rate is applicable to your PAYE Settlement Agreement (PSA)?

Establishing the tax rates for a PSA (PAYE Settlement Agreement) can be an administrative burden for employers. The situation can get more complex when an employee’s main residence is spread across the UK. This is because income tax has been partially devolved to Scotland since April 2016 and to Wales since April 2019.

An example may be an employer located in the borders of Scotland and England who provides taxable benefits to its workforce that mainly resides in Scotland and England, and the employer enters into a PSA in respect of these benefits.

For the PSA calculation, employers must establish the main residence of the employee, which should be clear from their PAYE tax code notification (this approach is confirmed in HMRC's Employer Bulletin from October 2019). For example, Scottish taxpayers are identified by an ‘S’ prefix and Welsh taxpayers by a ‘C’ (Cymru) prefix.

It should be noted that individuals are Scottish, Welsh, or English/ Northern Ireland taxpayers for the PAYE tax code for the full tax year. If the code prefix changes mid-year because someone has moved, for example, if 1257L changes to S1257L, then the year-end code prefix should be used as the status of the individual for the whole tax year. Employers should check if an employee's address has changed during the year prior to finalising the PSAs for that tax year.

Once the employer has established whether they have Scottish, Welsh or English/Northern Ireland taxpayers, they must consider the tax rate of the recipient on the PSA calculation or PSA1 form; for example, basic, higher or additional rate in England.

Details must then be provided in separate PSA1 forms/calculations. A PSA1 form or calculation should include information for those employees whose main residence is in England or Northern Ireland, and another PSA1 form/calculation should include those whose main residence is in Scotland. Although the tax rates in Wales are the same as those in England and Northern Ireland, Wales has devolved powers to impose its own tax rates, and so a separate PSA1 form/calculation should also be completed for those employees whose main residence is in Wales.

As an example, an employer headquartered in London that also has offices in Edinburgh and Cardiff must consider the appropriate PSA1 forms to be completed. In the scenario where the annual staff party is attended by all employees of the respective offices and the costs per attendee are above £150, the individual responsible for the PSA must split the costs on three PSA1 forms on a reasonable basis. It should also be noted that even if the employee does not pay tax, for example because their earnings are below the personal allowance, tax is due at the basic rate.

The tables below show thresholds and tax rates for Scotland and the rest of the UK for 2022–23, highlighting some significant differences in tax rates pertaining to employees’ earnings.

Scottish resident taxpayer

*Please note that from 6 April 2023, the higher tax rate will increase to 42%, the top tax rate will apply when earnings exceed £125,140 and the top rate of tax will increase to 47%.

Taxpayer resident in the rest of the UK (excluding Scotland)

*Please note that from 6 April 2023, the additional tax rate of 45% will apply to an employee earning over £125,140.

To summarise, the process for performing PSA calculations has become more complicated due to devolution. As a result, an employer needs to be comfortable they have established the right position and have a suitable audit trail, in case of HMRC review.

If you have any questions, please contact Neil Bridgeford or Lee Knight at RSM.