The tax legislation includes an exemption for staff long-service awards, but the qualifying conditions are tough and the tax-free reward isn’t generous. Is there a better alternative?
Long service
One of our subscribers recently asked us the maximum amount his company could spend on a gift for a senior employee and stay within the long-service tax and NI exemption. He was aware of the basic rules for the exemption which say that the gift:
- must be for 20 or more years of service
- is not cash or vouchers that can be converted into cash
- does not cost the employer more than £50 for each year of service; and that
- where more than one long-service gift is made to the same employee (or director) the exemption can only apply if there’s at least ten years between each gift.
Note. Working for different companies within the same group counts as the same employment.
Something like money
While our subscriber wanted to mark the occasion of 25 years’ service with a commemorative gift, he wanted to do more than present the ubiquitous engraved crystal decanter. He had in mind something that had monetary worth, but still fell within the exemption. The bad news is that the exemption is strictly for non-cash items and even excludes gifts like quoted shares that can be turned into cash.
Alternative exemptions
Aside from the splendid crystal decanter, our subscriber could use the relatively new trivial benefits exemption to make further tax and NI-free gifts to the employee. The trouble is that this exemption doesn’t apply to gifts of cash or something that can readily be converted to cash. However, it can be for non-cash vouchers. For example, it could be vouchers for a wine merchant.
Tip. While the trivial benefits exemption only applies to gifts costing no more than £50, it can apply more than once. For example, it would apply to vouchers redeemable in local restaurants for £50 given each month for, say, a year.
Something bigger
The chances are that a director or employee who has been with you for 20 or more years will be at least in their mid to late forties. This makes the option of a tax and NI-free substantial gift with real cash benefits possible.
Tip. An employer contribution to an employee or director’s pension fund (as long as it’s a registered scheme) is entirely tax and NI free.
Example. Chris is 50 and has worked his way up to finance director of Acom Ltd during the 25 years he’s been employed. Acom’s board approved a payment of £5,000 into a pension for Chris. The payment doesn’t count as taxable income for him. When he reaches 55 he could access the money, 25% of which would be tax free.
Tip. Acom should consider setting up a separate pension plan with the £5,000. This will make the arrangement potentially more tax efficient for Chris if he’s still paying into other pensions when he takes the money.
This article has been reproduced by kind permission of Indicator – FL Memo Ltd. For details of their tax-saving products please visit www.indicator-flm.co.uk or call 01233 653500.