If you give your employees incentives as part of a package of pay, you will have to pay PAYE tax and National Insurance on them.

There are different rules for what you have to report and pay depending on what the award is and whether it’s you or someone else who makes the award to your employee.

Incentive awards could be:

  • Cash.
  • Vouchers – including ones that can be exchanged for cash.
  • Non-cash items such as goods.
  • Prizes for employer-run competitions.
  • Holidays you pay for.

Cash or vouchers exchangeable for cash

Cash awards need to be included in the employee’s gross pay when working out both PAYE tax and NICs.

However, if a cash award is made to one of your employees by another business, you must calculate and pay the NICs due on the award – the other business must deduct PAYE tax from the award.

You must:

  • Report the value of the award to HM Revenue and Customs (HMRC) on a Full Payment Submission (FPS) at the time it’s provided – even if this is before the employee’s main payday.
  • Include the amount in the fields ‘pay subject to Class 1 NICs’ and ‘taxable pay in this pay period’ on the employee’s payroll record.

You have to report the award itself on or before the day it’s made, but you don’t have to calculate or report any NICs for the pay period until the last payment is made in that period.

Vouchers that can be exchanged for cash

These vouchers count as earnings, regardless of who gives the voucher to your employee, so you’ll need to:

  • Add their value to the employee’s other earnings.
  • Deduct and pay PAYE tax and NICs through your payroll.
  • Report any NICs for the pay period when the last payment is made in the same period.

Vouchers exchangeable for goods and services only (non-cash vouchers)

Add the cost of the vouchers to the employee’s earnings – unless they are luncheon or childcare vouchers. For these, use the voucher’s face value.

Non-cash vouchers exempt from NICs

These include vouchers for:

  • Travel between home and work on a work bus.
  • Social functions, such as a Christmas party, up to £150 per head.
  • Childcare vouchers up to a certain amount.

There are other types of vouchers that are exempt – check the full list in Employer Further Guide to PAYE and NICs here.
Non-cash vouchers not exempt from NICs

If another business provides one of your employees with a non-cash voucher without you being involved you don’t need to pay any NICs due on the award. It’s the third party’s responsibility to pay what’s due.

But if you provide it, or you arrange for another business to provide it, when the employee gets the voucher – even if this is before their main payday – you must:

  • Report the value of it to HMRC – 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 FPS.
  • Report any NICs for the pay period when the last payment is made in the same period.
  • Add the value of the award to the employee’s pay that was paid in the same period the award was made and work out NICs on this revised gross pay figure.
  • Deduct the employee’s share of NICs from any cash earnings you pay them, send an FPS to report them to HMRC and pay the NICs due on the revised gross pay figure.

Other non-cash awards

If another business provides a non-cash award to one of your employees and makes all the arrangements, it’s up to the employee to report this to HMRC – you don’t have to report or pay anything to HMRC.

But if you provide a non-cash award, find out if you have to pay either Class 1 or Class 1A NICs for a specific type of non-cash award by checking the very useful Expenses and Benefits: A to Z here.

Report what you’ve provided in one of these ways:

  • Enter the gross value of the award on form P11D or form P9D.
  • Enter into a Taxed Award Scheme or a PAYE Settlement Agreement with HMRC

And if it’s one you have to pay Class 1 NICs on:

  • Report the value of the award to HMRC even if this is before the employee’s main payday.
  • 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 FPS.
  • Add the value of the award to the employee’s pay that was paid in the same period the award was made and work out NICs on this revised gross pay figure.

Just Call!

All this sounds very complex, but it doesn’t have to be. Just call us and talk about your incentive plans and we’ll ensure you do the best for your employees and your business.

This information is invaluable for Finance and Marketing teams, especially this time of year, so please forward to them.