Advanced Taxation (UK) · National insurance contributions for employed and self-employed persons

Class 1B NIC and PAYE Settlement Agreements

Updated 11 October 2026 · Fact-checked

A PAYE settlement agreement (PSA) lets an employer pay the income tax on minor, irregular or impracticable-to-value benefits on behalf of employees. Class 1B NIC, at 15%, is charged on the value of those items plus the grossed-up tax. To solve it, gross up the tax, add it to the value, then take 15%.

Understand Class 1B NIC and PAYE Settlement Agreements

Normally, benefits and expenses are reported on form P11D. The employee pays income tax on them, and the employer pays Class 1A NIC. That is a lot of paperwork for small items such as an occasional staff party gift or a one-off taxi home.

A PAYE settlement agreement (PSA) is an agreement with HMRC. The employer pays the income tax due on certain items itself, in one annual payment. In return, the items are not put on P11Ds, the employees do not pay tax on them, and no Class 1 or Class 1A NIC is due on them.

A PSA can cover items that are minor, irregular, or where it is impracticable to work out each employee's share or value (for example, a staff event where individual shares are hard to apportion). It is not meant for regular, significant benefits such as company cars, and it cannot cover cash payments or round sum allowances. Check the wording of the question for which items it says are covered.

Because the employer is paying tax that the employee would otherwise bear, the tax is grossed up. The employer must pay enough tax that the employee is left with the benefit net of tax. The gross-up uses the employees' marginal rates. Where the question gives no rates, it is usual to assume they are higher rate taxpayers (40%), but follow any rates given.

Class 1B NIC is an employer-only charge on PSA items. It is charged on the value of the items plus the income tax paid under the PSA. The rate is the same as Class 1A, which is 15% in the tax tables. Check the tables in your exam. Class 1B is not grossed up and no tax is due on the NIC itself.

Advantages for the employer: less administration (no P11Ds for those items), employees are happy because they pay no tax, and the cost is usually a deductible employment expense. The disadvantage is that the employer bears the extra cost of the tax and NIC.

Key rules to remember

Grossed-up tax on PSA items: Tax = Value × t ÷ (1 − t); t is the employees' marginal income tax rate. At 40% this is Value × 40 ÷ 60. At 20% it is Value × 20 ÷ 80. Use the rates given in the question.
Class 1B NIC: Class 1B = 15% × (Value of items + Income tax paid under the PSA); Employer-only. Same rate as Class 1A. Take the rate from the tax tables in the exam.
Total cost of the PSA to the employer: Value + Tax + Class 1B NIC; Useful when a question asks for the total cost or compares with not having a PSA.
What a PSA can cover: Minor, irregular or impracticable-to-value items only; Not regular, significant benefits, and not cash payments or round sum allowances.
Employee treatment: Items in a PSA: no income tax for the employee, no P11D, no Class 1 or Class 1A NIC; Class 1B replaces the NIC that would otherwise arise.
Timing: Agree the PSA by 6 July following the tax year; pay tax and Class 1B by 22 October (electronic payment); Payment is annual, after the tax year ends. Postal payments are due slightly earlier, on 19 October.

How to solve Class 1B NIC and PAYE Settlement Agreements questions

Use this method for any question on a PSA or Class 1B NIC.

1Identify which items are in the PSA. Check they are minor, irregular or impracticable to value, and list their total value.
2Note any items that cannot be in a PSA (regular benefits, cash payments, round sum allowances). Deal with these under the normal P11D and Class 1A rules.
3Choose the employees' tax rate or rates. Use the rates given. If none are given, assume 40%. If the question splits employees by band, gross up each group separately.
4Gross up the tax: value × t ÷ (1 − t). Total the tax over all groups.
5Add the total tax to the total value of items to get the Class 1B base.
6Calculate Class 1B NIC at 15% of that base.
7Add up the total cost: value, tax and Class 1B. Mention the corporation tax deduction if the question asks for the net cost.
8Add short comments on the advantages, disadvantages and deadlines if the requirement calls for advice.

Quickest way: Gross up, add, take 15%

When to use it: Use it when the question gives the value of items in a PSA and asks for the tax, Class 1B or total cost.

At 40%, tax = value × 2/3. At 20%, tax = value × 1/4.
Class 1B base = value + tax. At 40%, this is value × 5/3.
Class 1B = base × 15%.
Total cost = base + Class 1B.

Common mistakes in Class 1B NIC and PAYE Settlement Agreements

Charging Class 1B on the value of the items only
Students forget that the tax paid by the employer is itself part of the charge.
Fix: Always use value plus grossed-up tax as the Class 1B base.
Not grossing up the tax, or taking 40% of the value
The tax looks like a simple percentage of the benefit.
Fix: Use value × t ÷ (1 − t). At 40% that is value × 40/60, not value × 40%.
Charging Class 1A on PSA items as well as Class 1B
Both are employer-only charges at the same rate, so they are confused.
Fix: PSA items bear Class 1B instead of Class 1A. Do not charge both on the same items.
Including regular benefits such as company cars in the PSA
Students assume a PSA can cover any benefit.
Fix: Keep PSAs for minor, irregular or impracticable-to-value items. Treat cars and other regular benefits through P11D and Class 1A.
Using one rate for all employees when the question splits them
Students are rushing and skip the detail in the scenario.
Fix: Gross up each group at its own marginal rate and add the results before calculating Class 1B.
Getting the deadlines wrong
PSA dates are mixed up with P11D dates.
Fix: Agree the PSA by 6 July after the tax year. Pay the tax and Class 1B by 22 October (electronic payment).

Worked examples

Example 1

Ridge Ltd has a PAYE settlement agreement. It covers items worth ₹30,000 provided to employees who are all higher rate taxpayers. Calculate the income tax and Class 1B NIC payable under the PSA and the total cost to Ridge Ltd. (Figures are used as a rate exercise. Class 1B is 15%.)

Show the solution

Tax rate is 40%. Tax = 30,000 × 40 ÷ 60 = ₹20,000.
Class 1B base = 30,000 + 20,000 = ₹50,000.
Class 1B NIC = 50,000 × 15% = ₹7,500.
Total cost = 30,000 + 20,000 + 7,500 = ₹57,500.

Answer: Income tax ₹20,000, Class 1B NIC ₹7,500, total cost to Ridge Ltd ₹57,500.

Example 2

Marlow Ltd has a PSA covering ₹12,000 of items for basic rate employees and ₹18,000 of items for higher rate employees. Calculate the tax and Class 1B NIC payable and the total cost. Class 1B is 15%.

Show the solution

Basic rate group: tax = 12,000 × 20 ÷ 80 = ₹3,000.
Higher rate group: tax = 18,000 × 40 ÷ 60 = ₹12,000.
Total tax = 3,000 + 12,000 = ₹15,000.
Total value = 12,000 + 18,000 = ₹30,000.
Class 1B base = 30,000 + 15,000 = ₹45,000.
Class 1B NIC = 45,000 × 15% = ₹6,750.
Total cost = 30,000 + 15,000 + 6,750 = ₹51,750.

Answer: Income tax ₹15,000, Class 1B NIC ₹6,750, total cost ₹51,750.

Exam tips

Show the gross-up as a separate line. Marks are usually given for the tax figure and for the Class 1B base separately.
If the question does not state employees' tax rates, say that you assume 40% and proceed. That is an easy assumption mark.
In advice requirements, give both sides: less administration and no tax for employees, against a higher cost to the employer. Tie this to the scenario's facts for professional skills marks.
Check each item for suitability. A regular, significant benefit in a PSA scenario is often a deliberate trap.
Remember the dates: agree by 6 July after the tax year, pay by 22 October.

Practice questions from National insurance contributions for employed and self-employed persons

Class 1B NIC and PAYE Settlement Agreements: frequently asked questions

What is a PAYE settlement agreement?

It is an agreement between an employer and HMRC. The employer pays the income tax on certain minor, irregular or impracticable-to-value benefits on the employees' behalf, in one annual payment. The employees then pay no tax on those items.

How is Class 1B NIC calculated?

Class 1B is 15% of the value of the items in the PSA plus the income tax the employer pays under the PSA. It is an employer-only charge. Take the rate from the tax tables in your exam.

What can be included in a PSA?

Items that are minor, irregular, or impracticable to value or apportion between employees. Regular significant benefits such as company cars should not be included, and cash payments and round sum allowances are not covered.

What are the advantages of a PSA for the employer?

There is less administration because the items are not reported on P11Ds, and employees pay no tax on them, which is good for goodwill. The cost is a deductible employment expense in most cases. The drawback is that the employer bears the tax and the Class 1B NIC.