# How to set up a long service award scheme

> Set up recognition and long service awards within HMRC rules: the £50-a-year exemption, trivial benefits, PSAs, cash and vouchers, with design.

Source: https://lumihr.co.uk/guides/how-to-set-up-long-service-recognition-scheme
Author: David Whitfield (https://lumihr.co.uk/about/david-whitfield)
UK law as at: 20 September 2026
Review by: 6 April 2027 (2027/28 rates), or sooner if HMRC changes the long service, trivial benefits, payrolling or PSA rules

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*By David Whitfield · Reflects UK law as at 20 September 2026 · Review by 6 April 2027*

> **In short**
> - A non-cash long service award is free of tax and NICs up to £50 per year of service. The employee needs at least 20 years' service and no other service award in the previous 10 years. Cash never qualifies.
> - Trivial benefits (£50 or less, not cash or a cash voucher) exclude rewards for work, so most recognition awards are taxable.
> - A PAYE Settlement Agreement (PSA) lets you pay the tax on minor non-cash awards yourself, at a grossed-up cost.
> - In the lumi reward benchmark, 58.1% of organisations operate a long service award scheme (n = 248) ([full findings](/research/recognition-long-service-2026)).
> - By the end you will have a tax route for each award, a costed design and a governance record.

## 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%.

**◆ Decision: monetary, experiential or voucher, points, or mixed?**
- **Monetary.** Simple to run through payroll, but tax and NICs reduce what the employee receives unless you gross up.
- **Experiential or voucher.** More visible. Non-cash vouchers are still taxable unless an exemption or a PSA applies.
- **Points-based.** Employees choose their reward; you get activity data. Confirm with your provider and tax adviser how redemptions are taxed.
- **Mixed.** Fits form to purpose; more than one tax route.

## Step 2: Map each award type to its tax route

| Award | Tax, NICs and reporting |
|---|---|
| Cash, or a voucher exchangeable for cash | Earnings: PAYE and Class 1 NICs through payroll [3, 7, 8] |
| Non-cash voucher | Class 1 NICs through payroll; income tax through P11D [7], then payroll from April 2028 [14] |
| Other non-cash award | Taxable benefit on P11D with Class 1A NICs, or a PSA [3, 8]; payroll from April 2028 [14] |
| Qualifying long service award or trivial benefit | Exempt; nothing to report |

**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].

| Case | Exempt limit | Cost | Taxable | Employer Class 1A |
|---|---|---|---|---|
| 20 years, first award | £1,000 | £1,200 | £200 | £30.00 |
| 25 years, 5 years after the 20-year award | £0 | £1,250 | £1,250 | £187.50 |

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).

**◆ Decision: which milestones?**
- **20 years, then gaps of more than 10 years.** Each award can be exempt. Shorter-serving staff get nothing.
- **Earlier milestones too.** Recognises more people, but these awards are taxable, and a 15-year award stops a 20-year award being exempt.
- **Non-financial only,** such as a letter or event. Low cost.

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].

| Route | Employer cost | Employee |
|---|---|---|
| Cash through payroll | £115.00 | £72.00 net |
| Non-cash voucher, taxed normally | £115.00 | £100 voucher; pays £28.00 |
| Non-cash voucher in a PSA | £143.75 | £100 voucher; pays nothing |
| Cash grossed up to £100 net | £159.72 | £100.00 net |

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

**◆ Decision: PSA or not?**
- **PSA.** Tax-free for employees. Higher cost and an annual deadline.
- **Payroll and P11D.** Lower cost, but employees see a tax charge.
- **Gross up cash.** A guaranteed net figure, at the highest cost.

## 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%.

**◆ Decision: face value or all-in cost?**
- **Face value per head.** Easy to communicate; true cost varies by tax route.
- **All-in cost.** Includes NICs and any PSA charge. Awards look smaller.

**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.

**◆ Decision: central, devolved or none?**
- **Central only.** Consistent and easy to audit, but slower.
- **Devolved.** Quick and local, but harder to keep consistent.
- **None.** Flexible, but hard to forecast.

## 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.

**◆ Decision: none, informal or platform?**
- **None.** Simple, but misses work managers don't see.
- **Informal.** Low cost and little administration.
- **Points or platform.** Visible and measurable; rewards need a tax route (Step 2).

## 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).

**◆ Decision: what to measure?**
- **Participation and spread.** Easy to collect; says little about outcomes.
- **Engagement survey items.** Needs a stable question set.
- **Retention.** Other factors blur the link.
- **Nothing formal.** Less effort; spend is harder to justify.

## 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

## FAQ

**How much can a long service award be worth tax-free?**
Up to £50 per year of service, for a non-cash award marking at least 20 years, with no other service award in the previous 10 years.

**Can recognition awards be trivial benefits?**
Not if they reward work or performance. HMRC also excludes long service awards.

**Are gift vouchers taxable?**
Usually. Cash vouchers are pay. Non-cash vouchers attract Class 1 NICs through payroll and go on the P11D, unless an exemption or a PSA applies.

**Do 5, 10 or 15-year awards qualify?**
No. The exemption needs 20 years, and an award in the previous 10 years blocks a later exemption.

## Related

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

## Sources

1. lumi reward benchmark, collection window 2026 H1, national figures: [full findings](/research/recognition-long-service-2026)
2. legislation.gov.uk, *Income Tax (Earnings and Pensions) Act 2003*, s.323 (up to date at 29 July 2026). https://www.legislation.gov.uk/ukpga/2003/1/section/323
3. HMRC, *Expenses and benefits: long-service awards* (accessed 20 September 2026). https://www.gov.uk/expenses-and-benefits-long-service-awards
4. HMRC, *Employment Income Manual* EIM01500–EIM01503 (accessed 20 September 2026). https://www.gov.uk/hmrc-internal-manuals/employment-income-manual/eim01503
5. HMRC, *Expenses and benefits: trivial benefits* (accessed 20 September 2026). https://www.gov.uk/expenses-and-benefits-trivial-benefits
6. HMRC, *Employment Income Manual* EIM21865 and EIM21868 (accessed 20 September 2026). https://www.gov.uk/hmrc-internal-manuals/employment-income-manual/eim21868
7. HMRC, *Expenses and benefits: vouchers* (accessed 20 September 2026). https://www.gov.uk/expenses-and-benefits-vouchers
8. HMRC, *Employee incentive awards* (updated 31 March 2026). https://www.gov.uk/guidance/employee-incentive-awards
9. HMRC, *PAYE Settlement Agreements* (accessed 20 September 2026). https://www.gov.uk/paye-settlement-agreements
10. HMRC, *Help with PAYE Settlement Agreement calculations — GfC1* (updated 1 September 2025). https://www.gov.uk/government/publications/gfc1-2022-guidelines-for-compliance-help-with-paye-settlement-agreement-calculations/gfc1-2022-help-with-paye-settlement-agreements-psa
11. HMRC, *Rates and thresholds for employers 2026 to 2027* (updated 1 September 2026). https://www.gov.uk/guidance/rates-and-thresholds-for-employers-2026-to-2027
12. legislation.gov.uk, *Equality Act 2010*, s.39 and Schedule 9, paragraph 10. https://www.legislation.gov.uk/ukpga/2010/15/schedule/9/paragraph/10
13. legislation.gov.uk, *Part-time Workers (Prevention of Less Favourable Treatment) Regulations 2000*, regulation 5. https://www.legislation.gov.uk/uksi/2000/1551/regulation/5
14. HMRC, *Changes to reporting of benefits in kind from April 2027* (policy paper). https://www.gov.uk/government/publications/changes-to-reporting-of-benefits-in-kind-from-april-2027
15. HMRC, *Getting ready for mandatory payrolling of benefits in kind* (interim guidance). https://www.gov.uk/guidance/draft-guidance-and-legislation-to-aid-preparation-for-reporting-benefits-in-kind-in-real-time/getting-ready-for-mandatory-payrolling-of-benefits-in-kind

*This guide is general information about UK employment law and practice as at the date shown. It is not legal advice. Take advice on your own circumstances.*

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