Yes, you can reward an employee for long service without them paying tax or National Insurance on it, provided the award meets four conditions. The employee must have at least 20 years' service, the award must not be cash, it must cost no more than £50 for each year of service, and there must have been no similar award to them in the previous 10 years.
Get those right and the award is exempt. Nothing goes through payroll, there is no Class 1A National Insurance for the business, and there is nothing to report on a P11D.
The four conditions
- 20 years or more. The award must mark at least 20 years of service with the employer.
- Not cash. A tangible gift, such as a watch, a piece of furniture, a holiday or a meal, qualifies. A cash payment does not, and neither does anything that works like cash.
- £50 per year of service. The cost to the business must not exceed £50 multiplied by the number of complete years served.
- No similar award in the last 10 years. You cannot give a 20-year award and then another qualifying award at 25 years. The next one would need to wait until 30 years.
A worked example
Sarah has worked for a Gloucestershire engineering firm for 25 years. The directors want to mark the milestone.
The maximum tax-free cost is 25 x £50 = £1,250. If the firm buys Sarah a weekend away costing £1,200, it is exempt. Sarah pays no tax on it and the company pays no employer's National Insurance. The cost is a normal staff cost and is deductible for corporation tax.
Now suppose the directors instead give Sarah a £1,200 bonus. That is cash, so it falls outside the exemption. It goes through payroll like any other pay. If Sarah is a higher rate taxpayer, she pays 40 percent tax and 2 percent employee National Insurance, so she keeps £696. The company also pays employer's National Insurance at 15 percent, which is £180.
The same £1,200 spent on a gift therefore delivers the full value to Sarah, while the cash version costs the business more and gives her a little over half.
Common mistakes
The rules are short, but there are a few ways they go wrong in practice.
- Vouchers that work like cash. A voucher that can be exchanged for cash is treated as cash. Choose a specific gift or experience instead.
- Going over the limit. Remember the limit is the cost to the business, including VAT and delivery. Check the final invoice, not the list price.
- Counting the years wrongly. Use complete years of service. An employee who has done 19 years and 11 months does not yet qualify.
- Forgetting earlier awards. Keep a record of what has been given and when, so the 10-year rule is not broken by accident.
Shorter service and other options
Most staff will not reach 20 years, and you may still want to recognise five or ten years with the business. There is no specific exemption for these, but there are other tax-efficient routes.
The trivial benefits rule allows gifts costing £50 or less, including VAT, provided they are not cash or a cash voucher and are not a reward for work or performance. A small gift to mark an anniversary can fit within this. For directors of close companies, trivial benefits are capped at £300 a year.
Anything outside an exemption can still be given. It just needs to be taxed, either through payroll, on a P11D, or through a PAYE Settlement Agreement where the business pays the tax on the employee's behalf so the gift arrives without a tax bill attached.
Keeping records
HMRC may ask how an award qualified. Keep a short note on file showing the employee's start date, the years of service being marked, the cost of the award with the invoice, and confirmation that there was no similar award in the previous 10 years. This takes a few minutes and avoids an argument later.
What to do
- List employees who will reach 20, 30 or 40 years' service in the next year or two.
- Work out the maximum tax-free amount for each: £50 multiplied by their years of service.
- Choose a non-cash gift that stays within that limit, including VAT and delivery.
- Check your records for any similar award in the previous 10 years.
- For shorter milestones, consider a trivial benefit or a PAYE Settlement Agreement instead of cash.
If you would like us to check an award before you buy it, book a free call.
