Tax on Employment Incentive and Award Schemes

Financial rewards will include bonuses, commission, employee stock options and paid time off. Non-financial incentives will include formal recognition/awards, vouchers, extra unpaid leave, gifts, company cars etc
Employment Incentive

Sometimes employers will award incentives or give out benefits of monetary value to their employees, in recognition of their services or achievements. it is important to know about incentives and how they affect the employee’s tax affairs. HMRC have given detailed definitions of awards schemes and how rewards are taxed in employment income manual EIM11202.

Incentives can be paid through PAYE and will be taxed normally by employer. Incentive awards can include cash, vouchers – including ones that can be exchanged for cash, non-cash items like goods, prizes for employer-run competitions and holidays you pay for. The only condition which HMRC have included is that awards may be linked to sales performance, good timekeeping, safety, or production records, or may involve participation in a lottery or prize draw. Schemes may be intended to benefit employees or the self-employed, or both.

Financial rewards will include bonuses, commission, employee stock options and paid time off.  Non-financial incentives will include flexible working hours, formal recognition/awards, vouchers, extra unpaid leave, gifts, company cars, training opportunities and further education opportunities.

We summarise some of the rewards and how they are taxed.

  1. Any award paid as cash is included in employees gross pay and tax and NI will be paid as normal. But if cash is paid by third party on employers’ behalf, employer must consider and deduct PAYE tax.
  2. Any vouchers given away as reward count as earning regardless who gives them to employee. Vouchers with face value or which can be exchanged for cash, the face value should be added to employee earnings and PAYE tax and NICs paid through payroll. Only luncheon or childcare vouchers are exempt from Tax.
  3. Non-Cash Vouchers like for social functions, Christmas parties, travel between home and work on a work bus and childcare vouchers up to certain amount are exempt from NICs.
  4. Any other non-cash vouchers which are paid as reward by third party on behalf of employer, its responsibility of third party to pay the tax.
  5. Other non cash awards paid to employee by another business will not be included in PAYE and it is up to employee to declare them to HMRC.

 

Employers can report Incentives and Awards in one of following ways.

  • Including gross value of award in Payroll and filling RTI
  • by filling in the gross value of the award on form P11D or form P9D
  • by entering into a Taxed Award Scheme or a PAYE Settlement Agreement with HMRC
  • And if it is one you must pay Class 1 NICs on

 

If you are an employer and you need to maximise tax benefits for your employee, call our specialist tax accountant team for further discussion.