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Overview

If you give out incentive awards as part of a pay package, or your employees get awards from a third party, you may need to pay PAYE tax and National Insurance contributions (NICs) on them.

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

What鈥檚 included as an incentive award

Incentive awards could be:

• cash
• vouchers - including ones that can be exchanged for cash
• non-cash items like goods
• prizes for employer-run competitions
• holidays you pay for

Cash or vouchers exchangeable for cash

Cash awards

Include in the employee鈥檚 gross pay when working out both PAYE tax and NICs.

But if a cash award is made to one of your employees by another business, then 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鈥檚 provided - even if this is before the employee鈥檚 main payday
• include the amount in the fields 鈥榩ay subject to Class 1 NICs鈥� and 鈥榯axable pay in this pay period鈥� on the employee鈥檚 payroll record

You have to report the award itself on or before the day it鈥檚 made, but you don鈥檛 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鈥檒l need to:

• add their value to the employee鈥檚 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鈥檚 earnings - unless they鈥檙e luncheon or childcare vouchers. For these, use the voucher鈥檚 face value.

Non-cash vouchers that are 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 拢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.

Non-cash vouchers that aren鈥檛 exempt from NICs

If another business provides one of your employees with a non-cash voucher without you being involved you don鈥檛 need to pay any NICs due on the award. It鈥檚 the third party鈥檚 responsibility to pay what鈥檚 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 鈥榩ay subject to Class 1 NICs鈥� and 鈥榖enefits on which Class 1 NICs are due鈥� on the employee鈥檚 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鈥檚 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鈥檚 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鈥檚 up to the employee to report this to HMRC - you don鈥檛 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 Expenses and benefits: A to Z.

Report what you鈥檝e provided in one of these ways:

• by filling in the gross value of the award on form P11D or form P9D
• by entering into a Taxed Award Scheme or a PAYE Settlement Agreement with HMRC

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

• report the value of the award to HMRC even if this is before the employee鈥檚 main payday
• include the amount in the fields for both 鈥榩ay subject to Class 1 NICs鈥� and 鈥榖enefits on which Class 1 NICs are due鈥� on the employee鈥檚 payroll record and send an FPS
• add the value of the award to the employee鈥檚 pay that was paid in the same period the award was made and work out NICs on this revised gross pay figure