Employee incentive awards
When to operate PAYE if your employee gets incentive awards from you or someone else.
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’s you or someone else who makes the award to your employee.
What’s 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’s 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’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’re luncheon or childcare vouchers. For these, use the voucher’s 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 £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’t 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 Expenses and benefits: A to Z.
Report what you’ve 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’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