It is not unusual for businesses to want to pay long-serving employees a cash bonus when they retire. But can this be done tax free, and if not, are any other options available?

In brief, the answer is “no – tax is payable”. Any sum paid to the retiring employee would be subject to PAYE and National Insurance in the usual way. There are no provisions that allow a retirement bonus to be paid tax free, in the way that up to £30,000 can be paid on redundancy.

There might be scope, within the usual limits to pay extra into their pension pot, and/or the employer can make a gift using the rules for ‘long service awards’.

Gifts to retirees and other long-standing employees

No liability for tax arises on ‘long service awards’ that meet the following conditions:

  • The gift:
    • must be something tangible, and can be shares in a company (or group of companies) that employs the individual receiving the award. It cannot be cash, a cash voucher, a credit token or other shares
    • must not be worth more than £50 for each year of service.
  • The employee:
    •  must have at least 20 years’ continuous service with the same employer
    • must not have received a long service award from the same employer within the previous 10 years,

So, if the employee has 21 years of service with the employer (and has not received a long service award within the previous 10 years), the employer would be able to give them a tax-free gift up to the value of £1,050 (21 x £50).

If a long service award is made that does not satisfy these conditions, the award would be a benefit in kind to the employee. It would need to be reported on a P11D and would be subject to Class 1A National Insurance.

However, if all the above conditions are met but the value of the gift is more than £50 per year of service, only the excess above £50 would need to be reported on a P11D and be subject to Class 1A National Insurance.

If you have any queries regarding retirement gifts to employees, please contact Jill Springbett at jill.springbett@mgr.co.uk

Warning: The above is merely general guidance and should not be relied upon as formal advice. The advice we give to each client will depend on their specific circumstances. We suggest you take professional advice before taking any action in relation to the issues discussed above.