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

Unfortunately, there is no specific exemption within the legislation for a gift to be made to an employee when they retire from their employment.  However, we may be able to utilise the Long Service Award (ITEPA 2003 Section 323) exemption depending on the type of gift made and meeting certain conditions.

If the gift consists of cash then the sum would always be treated as taxable (and NICable) 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.

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 and would be subject to Class 1A National Insurance.