Sales of prize bonds have grown steadily over the last few years. They remain a popular choice for Christmas gifts and birthdays.

Some employers have started giving them to employees as bonus payments or as incentive programme prizes. Prize bonds, unlike regular bonds, have no return but give holders the opportunity of winning tax-free cash prizes and guarantee the principal amount.

Family Money was recently contacted by an employer who believes the increasing popularity of the bonds among employers may be due to a misconception that these bonds are tax-free.

Mr P speaks from experience as he bought his employees a few prize bonds because he believed, due to media reports and conversations with Revenue, that they were a benefit-in-kind that was not taxable. Revenue is now asking him for a list of all benefit-in-kind given to employees including prize bonds.

Generally, any payment of cash or non-cash which is provided by an employer to an employee is taxable, according to senior manager of global HR solutions group at PricewaterhouseCoopers, Mr Ken O'Brien.

There are a few exceptions that are tax-free such as redundancy payments but most cash benefit-in-kind is liable to PAYE and PRSI. If it is non-cash, like a prize bond, there is no PAYE or PRSI due.

Although there is no withholding through PAYE when the benefit-in-kind is given there is an underlying income tax cost in the hands of the recipient, says Mr O'Brien. The obligation is on the individual to declare those benefits to Revenue.

In Mr P's case, his employees must pay income tax on the bond at the end of the year in which it was received. More frequently, Revenue is requiring employers to provide a benefit-in-kind list so recipients would do well to ensure they make the payment as required. The misunderstanding with prize bonds may have arisen because any prizes won are tax-free.