An incentive award is sometimes made available as part of a pay package or provided by a third party. It can involve rewarding your employee in a wide variety of ways such as with cash, goods, prizes, holidays or vouchers. This guide explains how you should treat these awards for PAYE tax and National Insurance contributions (NICs) purposes.
On this page:
The steps you need to take when one of your employees receives an incentive award depend on the following two factors:
An example of another business providing an incentive award would be a car manufacturer making performance related awards to salespersons employed at dealerships.
If you provide an employee with a cash award, then you must include its value in the employee's gross pay when working out both PAYE tax and NICs.
If a cash award is made to one of your employees by another business, then you are responsible for calculating and paying the NICs due on the award. The other business is responsible for deducting PAYE tax from the award. You should add the value of the award to the employee's pay - NICs are due on this revised gross pay figure. You can then deduct the employee's share of NICs from their cash earnings.
With vouchers exchangeable for cash, the position for PAYE tax and NICs remains the same regardless of who gives the voucher to your employee. You are responsible for deducting PAYE tax and paying NICs due on the award.
The position is slightly more complicated for non-cash incentive awards, as different procedures apply to PAYE tax and to NICs. The subsections below provide an overview of the rules for non-cash awards. More detail is contained in pages 25-26 of the HM Revenue & Customs (HMRC) publication CWG2, 'Employer Further Guide to PAYE and NICs' - you'll find a link to it at the bottom of this guide.
The value you should use for any deductions you must make is the cost to you of providing the non-cash award. There is an exception for luncheon and childcare vouchers - for these, the value to use is the voucher's face value.
If you provide an employee with a non-cash award or a voucher that can't be exchanged for cash, you must account for it in one of the following two ways:
If another business provides a non-cash award to one of your employees that it has arranged or facilitated, then that other business is responsible for the Class 1A NICs due. Neither you nor the other business need report the non-cash award for PAYE tax purposes, this is the responsibility of the employee.
A significant range of non-cash vouchers are exempt from NICs. These include vouchers for:
This is a selective list. For a full list see pages 26-27 of HMRC’s publication CWG2, 'Employer Further Guide to PAYE and NICs’ - there’s a link to it at the bottom of this guide.
With the exception of these exempt vouchers, you are responsible for deducting NICs if you provide a non-cash voucher to an employee or if you arrange for another business to provide one. You must add the value of the award to the employee's gross pay and work out the Class 1 NICs due on the total in the normal way.
In general, if another business provides one of your employees with a non-cash voucher without you arranging it, then you do not need to worry about the NICs due on the award. It is the third party's responsibility to pay the NICs owed. These will be Class 1A NICs, associated with benefits in kind, rather than the Class 1 NICs due on gross pay.
There is an exception for vouchers provided by a third party in connection
with payments to employees of readily convertible assets (these are
explained in another guide - see the link below). In these cases it
doesn't matter who arranged the award. As the employer you will always
be responsible for adding the value to gross pay and deducting NICs.
More about readily convertible assets (RCAs)
Different non-cash awards are treated in different ways for NICs purposes. Some attract Class 1 NICs and should be added to gross pay, while others attract Class 1A NICs and are accounted for as benefits received by the employee. For more information about reporting and paying Class 1A NICs, read HMRC's guides on expenses and benefits - use the link at the bottom of this guide. To find out whether a specific non-cash award attracts Class 1 or Class 1A NICs, see the two tables on pages 81-85 and pages 88-90 of HMRC’s CWG2 publication - there is a link to it at the bottom of this page.
Once you know whether Class 1 or Class 1A NICs apply, you must treat the award in the following way:
Extra payments on a day other than the usual payday
Download CWG2, ‘Employer Further Guide to PAYE and NICs’ (PDF 1.3MB)
Read HMRC's guides on expenses and benefits
For help with calculating and deducting PAYE tax and NICs on incentive awards, contact HMRC’s Employer Helpline.
