2025/26 PSA Reporting: Are cost efficiencies being overlooked?

A PSA is an agreement with HMRC under which an employer agrees to settle the income tax and Class 1B National Insurance contributions (NIC) on certain benefits and expenses provided to employees. PSAs are typically used for items that are minor, irregular or impracticable to process through payroll or report elsewhere.

Once agreed, a PSA remains in force unless it is formally varied or withdrawn by either the employer or HMRC. However, employers are required to review the PSA annually and notify HMRC of any changes to the items covered, including:

• New benefits or expenses to be included; or
• Items that are no longer provided or no longer meet the PSA criteria.

Failure to submit an accurate PSA calculation or to pay the associated liabilities within the required timeframes can result in interest and penalties.

For the 2025/26 tax year, the key dates are listed within the table in our "Employment tax reporting 2025/26" article.

Early preparation is essential to avoid overreporting and ensure accuracy and timely settlement of liabilities.

Amounts included in a PSA must be calculated on a VAT‑inclusive basis. As part of the PSA review process, this is an ideal opportunity to ensure that:

• VAT has been reclaimed where appropriate; and
• Any restrictions on recovery have been correctly applied.

This is particularly relevant where costs relate to staff or business entertaining where the VAT recovery rules can be unclear.

While PSAs are widely used, they remain a frequent area of HMRC scrutiny and can present several challenges:

• Scope Creep: Over time, items may be added to a PSA without sufficient reassessment of whether they remain ‘minor’ or ‘irregular’, particularly where values increase or awards become more frequent;
• Complexity: Calculating the correct tax liability can be complex where employees fall across different marginal tax bands or where benefits are provided to a mixed population. Incorrect assumptions can easily lead to understated liabilities; and
• Data Integrity: PSA calculations rely on complete and accurate data drawn from multiple systems, including expenses, payroll and HR platforms. Inconsistencies or gaps in data increase both compliance risk and administrative effort.

In the current tax compliance environment, HMRC are placing increased emphasis on data quality and data governance. The use of data analytics within annual compliance processes reduces reliance on individual judgement, ensuring that policies are applied consistently and that documented tax positions are systematically and objectively applied to each expense.

We have developed a range of powerful data analytics and AI enabled tools that can review data from multiple sources to:

• Reduce cost by quickly reviewing evidence to support the correct treatment of the expense and benefits, e.g. reviewing the narrative on employee expense claims, journeys, permanent workplace and locations to build a more complete picture;
• Compare reported values with the previous year’s treatment and policy to generate insights to demonstrate whether costs are being incurred as intended and how they compare across different functions, claimants and timeframes; and
• Provide feedback on data capture to improve data gathered at the point expenses are claimed to reduce the administrative burden in future years.

Other key benefits of partnering with KPMG include:

• Cost reduction through optimised application of reliefs and exemptions aligned with best practice;
• Stronger control environments supported by technology and robust audit trails;
• Enhanced management information and cost efficiencies from advanced analytics; and
• Freed‑up internal resource, allowing teams to focus on higher‑value, strategic priorities.

Now is an ideal time for employers to review their PSA arrangements. Early engagement with HMRC, robust data collection, and alignment with wider PAYE processes can help ensure that PSAs remain a valuable simplification tool rather than a compliance risk.

Please contact the authors or your usual KPMG in the UK contact to discuss how we can support your business with your employment tax year end reporting.

For further information please contact:

• Scarlett Rampton
• Sarah Haynes