There’s never been a better time to show your long-term employees you value them. And there’s no better way to do that than a long-term service award.
(5 minute read)
Today’s tip will explain:
- The current climate of employee turnover
- How to reward and encourage employee longevity
Can a Long-term Service Award Promote Employee Loyalty?
Times are changing quickly; employees are spending less and less time in one job before hopping to the next.
Gen Z and Millennial workers have much shorter tenures than their predecessors. With these younger employees spending only 2 ½ years with a business before moving on. For comparison, Gen X employees have an average tenure of nearly 6 years.
As job hopping becomes more commonplace, many businesses are looking for ways to incentivise longevity and to reward employees who stick around.
If you’re in this situation, a long-term service award could be the tax-efficient answer you’re looking for.
What is a Long-term Service Award?
A long-term service award is a way of celebrating your long-term staff, typically when they reach certain milestones such as 10 or 20 years of employment. The milestones you choose to recognise may depend on trends in your industry.
You could offer a cash bonus, a gift card/voucher, electronics, a plaque, a trip, etc. There aren’t many limits to what you can give as a reward.
However, although some of these awards are tax exempt, not all long-term service awards are. This means it can be tricky to know where an award falls in terms of tax liability.
Exemptions and reporting requirements vary depending on the type of award you give, its value, when you offer it and if you’ve given a particular employee a long-term service award before.
The most simple and tax-efficient long-term service awards are:
- Non-cash (and not readily transferrable, such as vouchers)
- Worth less than £50 per year of service
- Given to employees who’ve worked for you for at least 20 years
- Given to employees who haven’t had a long-term service award in 10 years
If the award fits these criteria, you don’t need to report or pay tax on it. This means you can spend up to £1,000 tax free to celebrate an employee of 20 years.
If the awards you provide don’t fit the exemption criteria, you must report to HMRC. When you report to HMRC, you must include all the costs and be sure to account for tax and National Insurance.
Cash awards are a very common long-term service award because your employee can choose what they want to do with it. However, these awards aren’t very tax efficient.
When giving an employee a cash award, you must add the award to their earnings. This means your employee may become liable for increased Income Tax and National Insurance and may also impact your payroll situation.
You must report the cost to HMRC. Currently, this is done via a P11D form. However, HMRC is retiring this. In the future, you should use HMRC’s online services.
You may have to pay Class 1A National Insurance on the award.
You don’t have to pay if the employee has been with your company at least 20 years and hasn’t received a long-term service award in 10 years. Except if the award costs more than £50 per year of service. In this case, you pay based on the value above £50.
Other awards are subject to Class 1A National Insurance on the full amount.
If the award is a readily convertible asset, you must also consider PAYE.
Is a Long-term Service Award Scheme Right for You?
A long-term service award is a fantastic way to celebrate your most dedicated employees for their commitment to your company. It’s a great way to show appreciation.
However, the tax implications can sometimes be difficult to understand due to the high number of variables. There are also other ways to reward employees, such as through a tax-efficient party!
If you decide to implement a scheme for your employees, make sure you carefully consider what awards you’ll be giving to your employees.
Kind regards Ilyas