Long service by a team member deserves to be positively recognised and it is natural to want to reward the employee for their dedication.
As with many benefits, employers should familiarise themselves with the tax and reporting obligations associated with long service awards.
Long service awards are exempt from reporting and tax if all of the following apply
- The employee has worked for you for at least 20 years;
- The award is worth less than £50 per year of service; and
- The employee has not been given a long service award in the last 10 years.
Your gratitude may take the shape of a cash amount or a non-cash gift – but it’s important to remember that only non-cash awards are exempt from tax. If the gift is cash or can be easily exchanged for cash, the gift will not be exempt tax under the above exemption.
When to pay tax
If a long service award does not meet all the qualifying criteria, you must report the costs to HM Revenue and Customs (HMRC) and deduct and pay tax and National Insurance on them.
Reporting requirements vary depending on the nature of the long service award – primarily if it’s a cash or non-cash award.
Cash awards contribute to an employee’s earnings and therefore you will need to
- Add the amount of the award to the employee’s other earnings; and
- Deduct and pay Class 1 National Insurance and PAYE through payroll.
So, with a cash amount, the employee will end up paying tax and National Insurance on their award.
Non-cash awards must still be reported if all the above conditions are not met for exemption, with specific requirements depending on the number of years of service and if any other award has been given.
For employees with at least 20 years of service and no previous award in the last 10 years, you will need to
- Report the amount on form P11D; and
- Pay Class 1A National Insurance on the value of the award over £50 per year of service.
For all other employees, you will need to
- Report the amount on form P11D; and
- Pay Class 1A National Insurance on the full value of the award.
Please note by the gift going through the P11D, the amount on the P11D will be taxable on the employee.
The above guidance assumes the gift is not a “readily-convertible asset”. A “readily-convertible asset” is one that can easily be exchanged for cash (such as quoted shares). These have a different tax and reporting treatment.
PAYE Settlement Agreement
You might want to consider a PAYE Settlement Agreement if the long service award does not meet the above tax exemption. This is only possible if the gift is non-cash.
By doing a PAYE Settlement Agreement, the gift does not need to go on the end-of-year P11D forms.
Instead, the employer pays the tax due on behalf of the employee (as well as the National Insurance the employer owes). However, please note as the employer is paying the employee’s tax on their behalf, the value of the gift (which is the figure taxed) is higher as it includes the tax paid on behalf of the employee. So, a PAYE Settlement Agreement does result in a higher amount of tax and National Insurance becoming payable.
How M+A Partners can help
M+A Partners’ team of experts work with clients to explain tax reliefs and tax exemptions. We can also assist with PAYE Settlement Agreements.
To find out more about the tax planning services we provide, get in touch with your usual M+A Partners’ contact or contact myself using the below details.
