Updated: Jul 31, 2022
Rewarding your valued employees is a great way to keep them happy, engaged and motivated.
When a member of staff clocks up an employment milestone, you want to show your appreciation for all their hard work.
Giving them extra benefits or rewards helps them feel valued and one of the tax-free benefits that’s often overlooked is long-service awards.
What is a long-service award?
A long-service award could be a cash sum, a non-financial reward or even share options in the company. But only non-cash awards can be given tax-free. If you give a cash amount or share options, you’ll have to report this to HMRC and the employee will be charged tax and National Insurance (NI) on the reward.
How do I give a tax-free long-service award?
Provided that you follow some simple rules, awards to employees for long service can be made without creating any adverse tax consequences for your employee.
The gift must not be cash, or anything which can be easily exchanged for cash (things like shares or precious metals).
The employee must have been employed for at least twenty years.
If you can tick both those boxes, then an award can be given tax-free. The value of the award must not exceed £50 per year of service and can be made without the need to deduct tax or NI contributions.
If your employee has received an award in the previous ten years, the value of that award is deducted from the amount of the later award. This will obviously lower the amount that can be made free of deductions.
How does this work in practice?
Let’s look at an example and see how you would make a long-service award.
For a 30-year award:
The maximum tax-free value of the long-service award is £1,500.
If the employee also had a 25-year award, the tax-free value of that will be deducted from the £1,500 leaving a minimum amount of (£1,500 - £1,250) £250. If the 20-year award was less than £1,250 then the deduction would be reduced, leaving more available for the later award.
If the most recent award was for 20 years' service, then because that was 10 years ago the £1,500 is not reduced.
What happens if I give a cash award?
If you give a cash award to your employee, the full value must always be included in payrolled earnings and subject to PAYE and NI as normal.
Where a non-cash award exceeds the tax-free amount, it can be reported on a P11d Forms
as a taxable benefit-in-kind, or the tax due can be included in a PAYE settlement agreement.
Talk to us about giving long-service awards
When you have an employee who has been with you for 20 years or more, an award is a great way to recognise their long service. But to ensure you do this in the most tax-efficient way, you need to be aware of the associated tax rules.
We’ll help you draw up the rules for any long-service award scheme and can keep you informed of any future changes in the requirements.