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 some simple rules are followed, awards to employees for long service can be made without any adverse personal tax consequences.

• The gift must not be cash, or anything which can be easily exchanged for cash such as shares or precious metals.
  
  
• The employee must have been employed for at least twenty years.
  
  
• The employee must not have received a similar award from the same employer in the previous 10 years.

If the above apply, then an award with a value not exceeding £50 per year of service can be made without the need to deduct tax or national insurance contributions.

Where your employee has received an award in the previous ten years, regardless of the tax treatment of that previous award, subsequent ones are fully taxable and subject to National Insurance Contributions (NICs).

How does this work in practice?

Let’s look at an example and see how you would make a long-service award.

For a 20-year award:

• The maximum tax-free value is £1,000 and will be tax-free provided no long service award was given in the previous 10 years.
  
  
• A subsequent 25-year award would be taxable in full, as the previous one was given within 10 years.
  
  
• A third award at 30 years would also be taxable in full, as its within 10 years of the 25-year award, even though that award was fully taxed. However, if there was no 25-year award – i.e. a break of 10 years had passed since the previous one – then a 30-year award would be tax-free up to a value of £1,500.

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 form 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

If you wish to recognise long service, 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 keep you informed of any future changes. Call us on 01904 787973 if you'd like to discuss this with us.