How to set up a long service award scheme

Before you start

Legal basis. ITEPA 2003, s.323 [2]; HMRC guidance [3–11]; Equality Act 2010 [12]; Part-time Workers Regulations 2000 [13].

Who to involve. Reward, payroll, finance, a tax adviser, communications and line managers.

What you need. Continuous service dates, including predecessor and group service. Current awards with form, value, frequency, spend and reporting route. Platform or voucher contracts.

Step 1: Choose the award currency

In the lumi reward benchmark, the common answer is that recognition awards are primarily monetary, 32.0% (n = 266, N/A excluded). Experiential or voucher (28.2%) and mixed (25.6%) are alternative answers. Points-based awards are rare, at 14.3%.

Step 2: Map each award type to its tax route

The P11D routes are time-limited. Mandatory payrolling of benefits in kind starts in April 2027 for company cars, fuel, vans and medical benefits, and extends to most remaining benefits in kind from April 2028 [14]. Recognition awards will then be taxed through payroll in real time, with Class 1A paid as you go, not on a P11D after year end. A PSA remains an alternative [15]. Plan the switch now.

A benefit is trivial only if it cost £50 or less, isn't cash or a cash voucher, isn't a reward for work or performance, and isn't in the contract [5]. Cost includes VAT; above £50 the full amount is taxable [6]. Close company directors are limited to £300 a tax year [5].

HMRC says benefits recognising services, "such as long service awards", do not qualify [6]. In its examples, £25 vouchers for weekly targets fail; a £30 Christmas gift to all staff can qualify.

Neither exemption applies through salary sacrifice [3, 5].

Step 3: Design long service milestones within the exemption

A long service award is exempt if [2, 3, 4]:

1. it marks at least 20 years' service, including predecessor and group companies;
2. it is tangible moveable property, shares in the employer or its group, or another benefit that is not a payment, cash voucher, credit-token or other securities;
3. it costs no more than £50 per year of service (any excess is taxable);
4. no other service award, taxed or not, was made in the 10 years ending with its date.

Cash never qualifies: use payroll, with PAYE and Class 1 NICs [3].

Worked example. Inputs: £50 per year; Class 1A at 15% for 2026/27 [11].

The employee also pays income tax on it, unless you use a PSA.

In the lumi benchmark (n = 87, N/A excluded), 67.8% recognise 10 years, 48.3% 20 years, 42.5% 5 years, 42.5% 25 years or more and 31.0% 15 years. On how awards are provided, the common answer is non-financial recognition only, 47.7% (n = 220; 45.9% not applicable).

Service is linked to age. Treating people differently by service is not age discrimination where the person with less service has up to 5 years. Beyond that, you must reasonably believe the service rule fulfils a business need [12]. Record your reasoning.

Step 4: Decide whether to use a PAYE Settlement Agreement

A PSA covers tax and NICs on minor, irregular or impracticable items in one annual payment, off payroll and P11Ds [9]. Minor items include "incentive awards, for example for long-service" and small gifts and vouchers. Cash payments such as bonuses cannot be included [9].

• Apply by 5 July after the first tax year it covers [9].
• Pay tax grossed up at each group's rate, plus Class 1B NICs on the items and the tax [10]. Class 1B is 15% for 2026/27 [11].
• Report on form PSA1. Pay by 22 October electronically or 19 October by post [9].

Worked example: £100 to a basic-rate taxpayer. Inputs: 2026/27 income tax 20%, employee NICs 8%, employer NICs 15%, Class 1B 15% [11].

PSA: grossed-up tax £25.00, Class 1B £18.75. For a higher-rate taxpayer the PSA cost is £191.67.

Step 5: Set the budget per head and award values

In the lumi benchmark, the common annual recognition budget per employee is £26–£50, 39.4% (n = 254). £51–£100 (24.4%) and up to £25 (21.3%) are alternative answers; more than £100 (9.4%) and no dedicated budget (5.5%) are rare. The common typical award is £51–£100, 37.5% (n = 208); more than £100 is an alternative answer, at 26.0%.

Worked example (illustrative). 400 employees at £50 a head is £20,000. As cash, the employer cost is £23,000. As non-cash vouchers in a PSA for basic-rate taxpayers, it is £28,750.

Step 6: Decide who holds the budget

In the lumi benchmark, 45.3% answered "No" when asked how manager recognition spending is budgeted, the common answer (n = 267). Central budget only (34.1%) and devolved manager budget (20.6%) are alternative answers.

Step 7: Decide on peer recognition

In the lumi benchmark, 51.7% have no peer-to-peer recognition, the common answer (n = 269). 48.4% (30.9% + 17.5%) do: 30.9% informally and 17.5% through a points or platform-based scheme, which is rare.

Step 8: Build in governance and fairness

• Equality. You must not discriminate in giving access to any benefit [12]. Review award patterns by protected characteristic, working pattern and grade.
• Part-time staff. They must not be treated less favourably than comparable full-timers; the pro rata principle applies unless inappropriate [13]. Decide how part-time service counts towards milestones.
• Frequency limits. In the lumi benchmark, 58.3% set clear limits on how often one person can receive awards, the common answer (n = 206).
• Records. Set approval levels and keep an award register with tax routes, reconciled yearly with payroll, P11Ds and any PSA.
• Scheme rules. A benefit in the contract cannot be a trivial benefit [5], so write down whether awards are discretionary.

Step 9: Measure impact

In the lumi benchmark, 58.7% do not measure the impact of recognition on engagement or retention, the common answer; 41.3% do (n = 269).

Checklist

• Collected continuous service dates
• Chosen the award currency
• Mapped every award to a tax and reporting route, including the April 2028 payrolling switch
• Checked no recognition award relies on the trivial benefits exemption
• Tested milestones against the 20-year, £50 and 10-year conditions, and recorded the business need
• Decided on a PSA and diarised 5 July and 19/22 October
• Costed the budget including NICs, decided budget holding and peer recognition
• Set up an award register, equality review and impact measures

Related

• Recognition and long service awards: UK benchmark 2026 — the benchmark findings behind the figures in this guide.
• How to build a financial wellbeing programme
• How to design a bonus scheme: eligibility, measures, gatekeepers, malus and clawback
• How lumi works: methodology — how these figures are collected and calculated.