What are the tax implications, if a gift is given to the employee upon retirement?

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    Unfortunately, there is no specific exemption within the legislation of tax on the gift given to employees upon retirement.  However, we may be able to utilize the Long Service Award (ITEPA 2003 Section 323) exemption depending on the type of gift made and meeting certain conditions. Gifts of cash or monetary value vouchers are subject to PAYE/NI in the same way as ordinary pay. The question here is that are retirement gifts taxable?

     

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    Are Retirement Gifts Taxable

    If the gift consists of cash then the sum would always be treated as taxable (and NICable) and there will be a tax on retirement gifts. Under section 62 ITEPA 2003 because the gift is being received by reason of the employment.  However, if the company were to purchase a tangible gift for the employee, for example, a watch, this may meet the qualifying conditions for exemption as a Long Service Award.

     

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    Cash Gifts

    Most retirement gifts from an employer to an employee are taxable in full via the P11D system with an employers’ Class 1A National Insurance liability arising. If the gift can be classed as immaterial.  Say one bottle of wine a year (even if the cost thereof is up to about £25), it will be non-taxable on the basis of triviality. But regular gifts or one high-value gift would have to be declared on form P11D (except in the case of non-director employees earning at the rate of less than £8,500 per annum) giving rise to tax liability on the employee and a Class 1A National Insurance liability on the employer.

    Section 323 ITEPA 2003 contains an exemption for a non-cash award given to an employee. That meets all of the following criteria:

    • The employee has worked for the company for more than 20 years,
    • The employee has not had a previous award in the last 10 years, and
    • The award is less than £50 per year of service.

     

    Therefore, if an employee has 25 years of service. He or she could receive a non-cash gift up to the value of £1250 without incurring a tax charge.  If the value of the gift exceeds £50 per year of service.  Then the amount in excess would need to be reported on a P11d as a taxable benefit. The gift would-be subject to Class 1A National Insurance and there will be a tax on retirement gifts.

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