Most people like to feel rewarded for a job well done.
Whether it’s a simple thank-you or an end-of-year bonus, there’s plenty of evidence for the benefits of rewarding employees for their hard work.
In fact, the Reward and Employee Benefits Association’s poll of 2,006 workers revealed that 82% felt motivated after receiving some form of recognition.
As an employer, there are certain tax obligations to consider when giving cash or non-cash rewards.
After a successful year, you might want to give your employees a bonus.
This kind of reward can be a strong motivator, as it draws a direct connection between the company’s performance and that of its employees.
Cash bonuses are however treated as earnings, so you’ll need to deduct income tax and class 1 national insurance contributions (NICs) through payroll.
Rewards other than cash can be just as effective at making employees feel valued for their work, and often carry much lower costs for the employer.
There are different rules for how each kind of non-cash bonus is taxed.
Private medical insurance
According to HMRC, the most widely received benefit among UK employees in 2020 was private medical and dental insurance. If you’re arranging and paying for the insurance directly, you’ll need to pay class 1A NICs at 13.8% on the taxable value.
The following medical treatments are exempt from tax:
- 1 medical check per tax year.
- eye tests, glasses or contact lenses if the employee uses a monitor or screen at work.
- medical treatment outside the UK, for employees working overseas.
- treatment or insurance that covers work-related injuries or diseases only.
- medical treatment up to £500 as part of a return-to-work plan.
Workplace nurseries are exempt from tax, but they must meet certain registrations and approvals, and be available to all your employees.
You can provide a fixed amount of employee-supported childcare to employees without having to pay or report anything. They must have joined your childcare or voucher scheme and had their wages adjusted on or before 4 October 2018.
To be exempt, the childcare you provide (or provide vouchers for) also needs to meet the criteria for workplace nurseries.
You can also provide childcare vouchers tax-free. Each eligible parent can pay a maximum of £243 per month from their salary into their Childcare Voucher account and use this to pay for registered childcare. They do not pay Tax or National Insurance on this amount, resulting in significant savings of up to £933 per parent, per year.
Company cars are taxed according to their list price, and the amount of tax depends on the emissions level.
Cars with high emissions are taxed more heavily than cars with low/zero emissions, so it makes sense to choose a cheaper, low-emission model.
The charge is capped at 37% of the list price, and you’ll pay class 1A NICs on the amount charged to tax.
Other rewards can be provided tax-free, within certain conditions, including:
- Pension contributions are tax-free as long as your total contributions don’t exceed the employee’s annual allowance.
- Parking spaces located at or near the workplace.
- A bicycle and safety gear can be made available if the main use is traveling to work, but the employer must retain ownership.
- 1 mobile phone can be provided, and the employer must retain ownership contract with the telecom’s provider.
- Meals and refreshments must be available to all employees in staff canteen.
- Christmas parties can also be tax free if they cost £150 or less per head and are open to all employees.
- Trivial benefits that cost company less than £50 and isn’t cash or a cash voucher.