Avoid tax on gift to worker

CB writes: I own and run a small manufacturing company and have a worker retiring after 30 years. I want to give him a £15,000 lump sum. I understand such payments up to £30,000 are exempt from income tax and National Insurance (NI). Is this true and do I need to tell the Inland Revenue?

Answer

There is a common misconception that any lump-sum payment on termination of an employment qualifies for the £30,000 exemption. This is not always the case, particularly at retirement. But it is possible for the payment to be tax-free if it is approved by the Revenue as a pension arrangement and if the retiring worker is not already in a Revenue-approved pension scheme. You would need to give full details of the payment and get specific approval from the Revenue´s pensions schemes office. Smaller amounts may not need specific approval provided the relevant conditions are satisfied. If the payment is not approved under these provisions, it should be included in the worker´s pay in the normal way, and income tax and NI applied. If the payment is made after he has left and the form P45 issued, tax should be deducted at the basic rate and NI calculated on the basis of a weekly earnings period. Whether the payment is made before or after he actually leaves your employment, you should write to the company´s PAYE office giving details of the date and amount of the payment and of the tax and NI deducted. You should also provide the worker with a copy of the letter.