Simon Littlejohns, Tax Partner at Chartered Accountants Friend Partnership Limited, with offices in Birmingham and London, offers his latest thoughts on tax planning opportunities when offering incentives to employees.
Potential tax liabilities, and the planning possibilities, always have to be considered with non-cash incentives given to management and staff in recognition of hitting work related performance targets. The incentives may be items such as: store vouchers, holidays, watches etc.
These notes address some specific issues but do not address all potential incentives which might be provided for employees.
If an incentive is provided which is not dealt with in these notes, say a gym club membership, whilst a general principle detailed below might seem to be in point, there would be a need to check the detail before going ahead.
The following assumptions have been used in preparing these notes:
All incentives are provided to the employees by the employer and not third parties;
- The employer will contract with all the suppliers of the incentives such that there will be no reimbursement of costs incurred by employees and no settlement of liabilities in the name of the employee. If not the treatment of the items will differ from that detailed below;
- All recipients are ‘higher paid’ employees – i.e. earning over £8,500 per annum; and
- These notes are prepared in accordance with HMRC practice and guidance at the date of these notes.
Executive summary and actions
- Any existing and intended incentives will give rise to income tax and NI liabilities for individual employees and NI liabilities and administration issues for the employer;
- All incentives should be provided by the employer directly, and not via others – e.g. the management team members incurring expenditure which is then reimbursed;
- With regard to staff entertaining the cost per head must be closely monitored as should the frequency and cost of such events;
- The employer should consider setting up a PAYE Settlement Agreement (‘PSA’) for the incentives; and
The P11D compliance for the incentives will be in line with the detail in the table at the end of these notes.
Tax issues – general
- All employee incentives, with the exception of certain very limited exceptions such as luncheon vouchers, certain childcare arrangements etc., will give rise to personal tax liabilities for the individual recipients;
- The manner in which the incentives are provide will dictate how the items are treated for income tax and NI purposes;
- The income tax and NI treatment is not necessarily the same for each item and will depend, as above, on how the incentives are provided;
- Income tax and NI liabilities for the individuals can be avoided by the employer entering in to a PSA; and
- Unless otherwise stated in these notes the cost to the employer of providing the incentives will be tax deductible because the expenditure is incurred wholly and exclusively for the purposes of the company’s trade.
Non-cash awards & non-cash vouchers – PAYE
- The employer must account for it in one of the following ways:
- by filling in the gross value of the award on form P11D; or
- by entering into a Taxed Award Scheme (‘TAS’); or
- a PSA with HMRC.
Non-cash vouchers – NICs
Vouchers exempt from NICs
- There are a range of non-cash vouchers which are exempt from NICs. These are not relevant here.
The employer provides or arranges to provide a non-cash voucher
- At the time the voucher is provided, even if this is before the employee’s main pay is paid, the employer must report the value of it to HMRC. It must include the amount in the fields for both ‘pay subject to Class 1 NICs’ and ‘benefits on which Class 1 NICs are due’ on the employee’s payroll record, and send an Full Payment Submission (‘FPS’) to report these figures to HMRC. (Action 1); and
The employer doesn’t have to calculate or report any NICs for the pay period until the last payment is made in the same period. Then, the employer must add the value of the award to the employee’s pay that was paid in the same period the award was made and assess the NICs due on this revised gross pay figure. The employer must then deduct the employee’s share of NICs from any cash earnings paid to them, update its payroll records and send an FPS to report them to HMRC and pay the NICs due on the revised gross pay figure. (Action 2).
Non-cash awards – NICs
- With the gift of an asset, food, groceries, Christmas boxes etc., which is not an asset readily convertible in to cash, the gross amount will be subject to Class 1A NICs;
- With holiday vouchers the gross amount will be subjected to Class 1 NICs; and
- With a holiday which the employer arranges and pays for, the gross amount will be subject to Class 1A NICs.
If the award attracts Class 1 NICs
- As above Actions 1 and 2.
If the award attracts Class 1A NICs
- If the award attracts Class 1A NICs, and the employer provides the award or it arranges or facilitates its provision, then the employer must report and pay the NICs in the normal way as part of the P11D compliance routine.
The employer pays an employee’s tax
- If the employer pays all or part of an employee’s tax that is due on an award that is made to them, it must include the value of the tax that it has paid on their behalf in the employee’s gross pay when calculating Class 1 NICs. The employer has to do this whether or not the tax is accounted for through a TAS.
Calculating, recording and reporting NICs
- Include the value of the tax paid on behalf of the employee, whether it was the employer or someone else who paid it for them, in ‘pay subject to Class 1 NICs’ on their payroll record and report this to HMRC in an FPS. Do this when the tax is paid to HMRC, even if this is before the employee’s main pay is paid in that pay period; and
- Action 2 above.
- Any cash award needs to be included in the employee’s gross pay when working out both PAYE tax and NICs; and
- Vouchers exchangeable for cash also need to be included in the employee’s gross pay when working out both PAYE tax and NICs.
Awards of cash or vouchers exchangeable for cash
Recording and reporting for cash and vouchers exchangeable for cash
- At the time the award is provided, the employer must report its value to HMRC even if this is before the employee’s main pay is paid. The amount should be included in the field ‘pay subject to Class 1 NICs’ on the employee’s payroll record and if it is cash, also include the amount in the field ‘taxable pay in this pay period’. Then report these figures to HMRC by sending a FPS; and
- Action 2 above.
Valuing and apportioning non-cash awards and vouchers
- The value to use when calculating PAYE and/or NICs is the cost to then employer of providing the non-cash award; and
- The value should be clear and the apportionment across employees should be straightforward.
Vouchers bought by senior staff for team members
- The vouchers are acquired by an individual using their own personal credit card. The amount paid is then reimbursed by then employer;
- The amount should be entered on the employee’s P11D; and
- The employee will need to make a claim in respect of the business expense.
Thus in order to avoid the need for this paper trail such vouchers should be purchased directly by the employer.
Employee nights out
No tax liability arises if certain conditions are met with regard to the event(s).
- The event must be available to employees generally: or
- Available to employees generally at one location;
- If there is one annual event for employees no tax charge arises if the cost of the event per head does not exceed £150;
- If the employer provides two or more events no charge arises in respect of the event, or events, for which cost(s) per head do not exceed £150 in aggregate. For each function the cost per head should be calculated. The cost per head of subsequent functions should be added. If the total cost per head goes over £150 then whichever events best utilise the £150 are exempt, the others taxable; and
- If an event is only open to some of the employees, such as an event for management, this exemption will not apply.
Long service awards
- Certain long service wards are free from tax where non-cash assets below a certain financial limit are given to employees who have served for a certain number of years; and
- The limit is £50 for every year of service in excess of 20 years.
Gifts and other voluntary payments from third parties
Small gifts of goods made to employees (or a member of their family or household) are exempt from tax if the following conditions are met:
- The gift is not provided by the employer, or a person connected with the employer;
- Neither the employer, nor a person connected with the employer, directly or indirectly procured the gift;
- The gift is not made in recognition, or in anticipation, of particular services performed by the employee;
- The gift is not in cash or in vouchers or securities that can be converted into cash; and
- The total cost to the donor of all eligible gifts to the employee in a tax year does not exceed £250. The cost to the person making the gift includes any VAT paid, whether or not it is reclaimable.
Where the cost of a gift, or gifts, an employee receives from the same third party in a tax year exceeds £250, tax will be payable on the full amount of the gifts.
PAYE and NIC treatment of incentives
- It should be reasonably clear where the necessary items need to be entered on the online P11Ds – the box references above are for guidance only.
- Where there is a choice, for example with regard to holidays, it would make sense, for the employer to arrange the holiday rather than provide vouchers.
- A PSA will help reduce the company’s administration burden.