Introduction: The PAYE Settlement Agreement Your Employer Never Explained
A PAYE Settlement Agreement hands your UK tax bill on staff perks to your employer, yet it quietly creates a US tax problem that almost nobody warns Americans about. Every UK guide on this subject speaks to employers. Consequently, the American sitting in a London office reads about deadlines that are not hers. Meanwhile, she misses the one consequence that costs real money.
The mechanics matter enormously. Britain removes the benefit from your income entirely. However, the United States does not recognise that removal, and the tax your employer paid was never legally yours. Therefore you owe US tax on a benefit that generated no credit whatsoever.
What a PAYE Settlement Agreement Actually Does
A PAYE Settlement Agreement is a voluntary contract between an employer and HMRC. Under it, the employer settles the income tax and National Insurance on minor, irregular or impracticable benefits. One annual payment covers the lot. Furthermore, the employer pays that tax on a grossed-up basis at each employee's own marginal rate.
The statutory footing sits in sections 703 to 707 of the Income Tax (Earnings and Pensions) Act 2003, supported by regulation 105 of the PAYE Regulations. Critically, section 703 treats the covered earnings as excluded from the employee's income. Accordingly, you are not chargeable at all.
Why Nobody Told You
Employers rarely discuss a PSA with staff, because from a UK standpoint there is nothing to tell you. You receive no P11D. Additionally, nothing appears on your Self Assessment return. Consequently the whole arrangement stays invisible until an American files Form 1040 and cannot explain a gap.
At TaxYork we see this pattern constantly among bankers, fund professionals and company directors. Notably, the higher your marginal rate, the larger the hidden number becomes.
How the PAYE Settlement Agreement Machinery Works Under UK Law
HMRC restricts what such an agreement may cover, and those limits shape exactly what lands on your US return. Understanding the gateways therefore lets you reconstruct the benefit value your employer never disclosed.
The Three Gateways: Minor, Irregular and Impracticable
HMRC permits three categories, set out in its guidance on what a PSA can include. Minor items cover incentive awards, telephone bills, small gifts and vouchers, staff entertainment tickets, and non-business overnight expenses above the daily limits. Irregular items cover relocation costs above £8,000, overseas conference attendance, spouse travel abroad, and use of a company holiday flat.
Impracticable items form the third gateway. Specifically, these include non-exempt staff entertaining, shared cars and personal care such as hairdressing. Each of those categories represents taxable compensation in American eyes, which is precisely where the collision begins.
What HMRC Refuses to Allow
A PSA cannot cover wages, high-value benefits such as company cars, or cash payments. Likewise, bonuses, round sum allowances and beneficial loans stay outside. HMRC explains the boundary in its PSA manual at PSA1020.
That exclusion list helps you enormously. Since cash never enters a PSA, anything settled this way is a non-cash fringe benefit. Therefore you value it at cost to the employer when you report it to the IRS.
The Grossed-Up Calculation and Class 1B
The gross-up drives the cost. The employer meeting your tax counts as a further benefit. Therefore HMRC requires the calculation to run at your marginal rate on a grossed-up figure. For an additional-rate taxpayer, £1,000 of benefit generates £818 of tax. Moreover, the employer then pays Class 1B National Insurance at 15%. That charge applies to the benefit plus the grossed-up tax, as the 2026 to 2027 employer rates and NIM18020 confirm.
Separate computations apply for England and Northern Ireland, for Scotland, and for Wales. Consequently a Scottish-resident American attracts a 48% top rate, which pushes the gross-up higher still.
PAYE Settlement Agreement Deadlines Governing Your 2025/26 Benefits
Deadlines belong to your employer, yet they tell you when the numbers become available. Therefore you should track them.
5 July 2026 to Apply or Amend
The application or amendment deadline for a PAYE Settlement Agreement covering 2025/26 was 5 July 2026, per HMRC's deadlines and payment guidance. Since 2018/19, agreements endure automatically until cancelled. Consequently your employer probably holds one already without revisiting it annually.
22 October 2026 to Pay
Employers must pay the tax and Class 1B by 22 October 2026 electronically, or 19 October 2026 by post. Interest and penalties follow late payment. Importantly, that October date is when your employer's PSA computation exists in final form. Accordingly, October is the ideal moment to request your individual benefit schedule.
The Question to Ask Your Payroll Team
Ask payroll for the value of items included in the PSA attributable to you, split by date of receipt. That second element matters more than most people realise. Specifically, the UK tax year straddles two American calendar years, so a single PSA feeds two separate Forms 1040.
The US Tax Collision No UK Guide Mentions
Here lies the gap. Every major UK page on this topic, including the detailed employer guides published by large accountancy firms, addresses UK compliance alone. None addresses the American employee. Nevertheless, the consequences are substantial.
Britain Removes the Benefit, America Does Not
Section 703 excludes the benefit from your UK income. However, the Internal Revenue Code contains no equivalent provision. Under section 61, compensation includes fringe benefits regardless of who settles the foreign tax. Therefore the full value remains gross income on your Form 1040, as Publication 54 confirms for citizens abroad.
Some items escape. Occasional group meals, company picnics and genuinely trivial perks may qualify as de minimis fringes under section 132. Notably, Publication 15-B confirms that cash and cash equivalents never qualify, which removes gift vouchers from that relief entirely.
Why You Cannot Claim a Foreign Tax Credit
This is the expensive part. The foreign tax credit under section 901 belongs to whoever bears legal liability for the foreign tax. Treasury Regulation 1.901-2 states that rule plainly. Under a PAYE Settlement Agreement, that person is your employer. Consequently you cannot claim a penny of it on Form 1116.
The result feels perverse. Britain collected substantial income tax on your benefit. Meanwhile, America taxes the same benefit and grants you no relief, because the foreign tax credit rules follow legal liability rather than economic burden.
The Old Colony Question
One point works in your favour. Ordinarily, an employer paying an employee's personal tax creates additional income under the principle in Old Colony Trust. However, a PAYE Settlement Agreement makes the tax the employer's own primary liability rather than yours. Therefore the grossed-up element should not represent further US income to you, even though it inflates your employer's cost.
That distinction is worth confirming in writing with your employer. Similarly, it is worth documenting in your file should the IRS ever query the figures.
Working the PAYE Settlement Agreement Numbers on Your US Return
Reporting correctly requires three steps: obtain the value, split it by calendar year, and decide how to shelter it.
Reconstructing the Benefit Value
Your employer holds the underlying schedule. Request the benefit value only, excluding the grossed-up tax and Class 1B. Furthermore, ask for dates. Since the PSA covers 6 April to 5 April, items received before 31 December belong on one return and later items on the next.
Convert using a defensible rate. The IRS accepts a consistent annual average, and the 2025 figure of roughly 0.759 pounds per dollar serves most filers well.
Exclusion Versus Credit on Uncredited Benefits
Two shelters exist. The foreign earned income exclusion covers non-cash benefits from services performed abroad. Ceilings reach $130,000 for 2025 and $132,900 for 2026 under the FEIE rules. Consequently a moderately paid American may absorb the whole amount.
High earners cannot. Once salary alone exhausts the exclusion, the benefit sits fully taxable. Nevertheless, a second route often rescues the position, and most advisers miss it.
If Your Employer Will Not Share the Schedule
Some payroll teams decline individual breakdowns, citing the collective nature of the settlement. However, you are not stuck. HMRC requires employers to retain their PAYE Settlement Agreement computations, and those records identify the underlying events.
Therefore you can reconstruct a defensible figure yourself. Event invitations, award letters, conference bookings and expense claims establish both value and date. Furthermore, the IRS accepts a reasonable valuation method for non-cash fringe benefits, provided you apply it consistently.
Document your workings and retain them. Where a PAYE Settlement Agreement figure remains genuinely unobtainable, disclose your estimate and its basis. Above all, never omit the item simply because your employer stayed silent.
The Limitation Fraction Rescue
Although the PSA tax generates no credit, the benefit is foreign-source general-basket income. Therefore it increases the numerator of your section 904 limitation fraction. If you already carry excess UK credits from salary taxed at 45%, those surplus credits can absorb the new income entirely.
In practice, this means the cost is nil for many additional-rate employees and painful for anyone relying on the exclusion. Accordingly, the right answer depends entirely on your wider position, which is why foreign tax credit planning under the US-UK treaty repays proper analysis.
Case Study: An American Managing Director in London
Consider Claire, an American managing director at a London investment bank during 2025/26. Her employer operates a PAYE Settlement Agreement covering departmental entertaining and awards.
The Facts and the UK Position
Claire's share of PSA items totals £5,000. That figure comprises £2,100 of away-day and staff entertaining and £600 of long-service vouchers. Additionally, it includes £480 of excess overnight subsistence and £1,820 of spouse travel to an overseas conference. She pays UK tax at 45%.
Her employer grosses up at 45%, producing £4,090 of income tax. Class 1B at 15% on £9,090 adds £1,363. Consequently the employer spends £10,453 to deliver £5,000 of perks. Claire, meanwhile, reports nothing in Britain and receives no P11D.
The US Position and the Real Cost
On her Form 1040, roughly £700 of occasional group entertaining qualifies as de minimis. However, the £600 of vouchers cannot, and neither can the spouse travel. Therefore £4,300, or about $5,665, becomes taxable compensation.
Claire's salary already exceeds the exclusion, so no FEIE capacity remains. At 37%, the headline exposure reaches $2,096. Nevertheless, Claire carries $19,000 of excess general-basket credits from UK tax on salary. Because the benefit adds foreign-source income to her limitation, those credits absorb the entire amount and her actual cost falls to zero.
The Colleague Who Pays
Her colleague David, a secondee earning $118,000 and electing the exclusion, sits differently. He has no excess credits, because the exclusion removed his UK-taxed salary from the credit computation. Consequently his £4,300 of benefits fall outside the exclusion ceiling only partially, and the remainder attracts genuine US tax with no offset. Ultimately, the same PAYE Settlement Agreement costs one American nothing and another several thousand dollars.
What Changes Next for the PAYE Settlement Agreement Regime
Two reforms deserve your attention, and both are live right now.
The 15 September 2026 Call for Evidence
HMRC published a call for evidence on PAYE Settlement Agreements on 23 June 2026, closing at 11:59pm on 15 September 2026. It examines how employers decide what to include and whether the rules are clear, consistent and fair. Importantly, HMRC states it is not changing how benefits are taxed and introduces no new tax.
Responses go to payeconsultations@hmrc.gov.uk. Therefore employers with substantial American populations still have time to raise the credit mismatch directly.
Mandatory Payrolling from April 2027
The government will phase in mandatory payrolling of benefits in kind. Company cars, fuel, vans and medical benefits become mandatory from 6 April 2027, with most other benefits following from April 2028. HMRC confirmed the timetable in the June 2026 Employer Bulletin.
Crucially, PSAs survive alongside payrolling, and benefits inside a PAYE Settlement Agreement need not be payrolled. Consequently the American mismatch persists well beyond 2028 unless HMRC acts.
What to Do Before the Rules Move
Request your PSA schedule now for 2025/26 and 2024/25. Additionally, review whether earlier years went unreported on your US returns. Where they did, catching up on missed US tax returns is generally straightforward while the position remains non-wilful. Meanwhile, confirm that any foreign accounts holding your UK earnings meet FBAR and FATCA reporting requirements.
How TaxYork Can Help
We prepare US and UK returns for senior professionals across banking, private equity and professional services. Consequently we handle PSA reconstructions regularly, and we know which employers disclose the underlying schedules willingly.
Our work begins with obtaining the benefit values and splitting them across the correct calendar years. Furthermore, we model the exclusion against the credit to identify which route leaves you better off. Where excess credits exist, we demonstrate the absorption on Form 1116 with supporting computations.
We also review prior years. Where a PAYE Settlement Agreement went unreported, we quantify the exposure and recommend the appropriate correction route. Additionally, we coordinate with your employer's global mobility team so the numbers reconcile. Guidance from the ICAEW on employment taxes and the AICPA tax resources informs our approach throughout. Similarly, our cross-border tax planning for executives service supports the wider picture.
Conclusion
A PAYE Settlement Agreement delivers genuine simplicity in Britain and genuine complexity in America. Britain excludes the benefit from your income under section 703, so nothing reaches your Self Assessment return. However, the IRS taxes the same benefit and denies you the credit, because your employer, not you, bore the legal liability.
The practical outcome varies sharply. Additional-rate earners with excess credits usually absorb the cost entirely. Conversely, those relying on the foreign earned income exclusion face real, unrelieved tax. Therefore the only sensible approach is to obtain your PSA figures, split them correctly, and model both shelters before you file.
Above all, do not assume silence means safety. The absence of a P11D reflects UK law, not American law. Ultimately, a PAYE Settlement Agreement you never knew existed can still create an IRS liability you must report.
Contact Us
Speak to our specialists about your PSA benefits and your US filing position. You can contact us or book a consultation at a time that suits you.
Email hello@taxyork.com or telephone 020 3488 8606. Additionally, you can review our full range of US tax returns for expats services online. UK rate and threshold detail is available from HMRC income tax rates and the PSA overview.
Disclaimer
This article provides general information about the PAYE Settlement Agreement regime and its United States tax consequences. It does not constitute tax advice for any particular person or situation. Tax legislation, rates and thresholds change frequently, and the application of any rule depends on individual circumstances. Therefore you should obtain professional advice before acting on anything set out here. TaxYork accepts no liability for loss arising from reliance on this article without such advice.