My VIP Tax Team question of the week: Can an employer pay out a tax-free retirement bonus?
My client wishes to pay a tax-free retirement bonus to one of their employees who is retiring after 25 years’ service, is this possible?

If an employer wishes to pay a retirement bonus tax free then, unfortunately, they cannot as any cash amount payable to a retiree would be treated as earnings within S62 ITEPA 2003 and therefore would be subject to PAYE and NI and processed through the payroll in usual way.  This is because it is their choice to retire, and no tax-free provision is in place to pay them a retirement bonus tax free as you would pay a tax-free redundancy amount of £30K.

Another option for a retiree reward would be for the employer to buy the employee a gift upon retirement.  S323 ITEPA 2003 sets out the requirements for a retiree to receive such an award tax free from their employer.

To receive a gift tax free, the following conditions would need to be met.

  • the gift must be something other than cash, a cash voucher, a credit token or shares except shares in a company (or group of companies) that employs the individual receiving the award. Details of this condition are found in S323(3) ITEPA 2003
  • the employee must have at least 20 years of continuous service with the same employer
  • a long service award cannot have been received by the employee from that employer in the previous 10 years (see EIM01510 for an example of this)
  • the value of the award must not exceed £50 for each year of service

The employee in this case has 25 years of service with their employer so if no other long service award has been received within the last 10 years, then the employer would be able to buy the employee a gift to recognise their long service tax free up to the value of £1250 (25 x £50)

If a long service award did not meet the conditions of the exemption, then the value of the award would be a benefit in kind to the employee and would need to be reported on a P11D and a Class 1A NIC liability would arise.

If the conditions of the award were met but the value of the award was above £50 per year of service, then the excess on the value of the award above £50 per year of service would need to be reported on a P11D and Class 1A NIC paid as appropriate. Please see EIM01501.

 

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Payroll Adviser
0844 892 2470


Sue is a Payroll Adviser on the tax consultancy advice lines. Sue has over 20 years of payroll experience gained both from working in a payroll bureau for a chartered accountants and more recently as a payroll manager for a large retail company.

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