When it comes to cultivating a happy, loyal and productive workforce, it is essential to show your employees that you care about them. The best employers understand that to get the most out of their staff, they need to make them feel valued and appreciated.
There are various ways you can do this, from sending them a thank you card for a job well done to organising a corporate away day. Another way to reward your staff and increase motivation is to give them a gift. And Christmas is the ideal time to do this.
But while your intentions are nothing but good, being too generous can disgruntle your employees rather than delight them. This is because they could have to pay tax on the present.
So, before you start splashing out on Christmas gifts for everyone in your company, it makes sense to understand what the tax implications are first. In this article, we’ll explain all.
As long as it is non-contractual, worth less than £50 (including VAT and delivery costs) and not for services performed, an employer can give a tax-free seasonal gift — such as a Christmas or birthday present — to an employee, as it will be classed as a “trivial benefit”.
Some examples of gifts that are classed as trivial benefits could be a box of chocolates, a turkey, a bottle of wine or a bunch of flowers.
Continue reading to find out how Christmas gifts over £50 are taxed, whether gift vouchers, Christmas bonuses and Christmas parties are taxed and what the rules are when it comes to client Christmas gifts.
A trivial benefit must be non-contractual, worth less than £50, including VAT and delivery costs and not be for services performed.
If you give a member of your staff a Christmas gift that’s worth more than £50 — such as an expensive hamper or a case of wine — it will need to be declared to HMRC on a form P11D or through a PAYE Settlement Agreement (PSA).
It is important to understand that the £50 limit is not an allowance, which means a Christmas gift that costs £55 would be taxable in full, not just the excess. For gifts worth more than £50, the employee would be responsible for paying tax on it, while you, as their employer, would need to pay the National Insurance.
If the individual cost for each employee’s gift can’t be confirmed, you can use an average.
A cash gift — or Christmas bonus — is taxable as earnings in the usual way. This means it will appear on an employee’s payslip, and, if applicable, both Income Tax and National Insurance will be deducted.
If you give an employee a voucher that can be exchanged for cash (a cash voucher), it will be treated in the same way as a cash gift. The employee will be taxed on the face value of the voucher, no matter how much the employer paid for it.
A voucher that can be exchanged for goods and services (a non-cash voucher) will be treated as a trivial benefit if it is worth less than £50. If it is worth more than £50, tax will be payable, and it must be reported on the employee’s P11D form or included in a PSA.
Employee gifts from third parties will not be subject to tax if they are worth less than £250, including VAT (whether or not the VAT is reclaimable). This means that if an employee receives a thank-you gift — such as a bottle of champagne — from a customer or supplier, the employee shouldn’t have to pay tax on it.
An employee may have to pay tax on a cash gift if it is customary for these types of gifts to be given, and the expectation that gifts will be received is in their terms of employment.
A Christmas party will be free of tax and National Insurance contributions as long as it is available to all staff (or all staff based at one location) and the total cost of the event is less than £150 per head, including VAT.
When calculating the total cost of the party, you need to work out what you’ve spent on the whole event, from start to finish. Remember to include everything you’ve spent on things like food, drink, transport, accommodation and entertainment.
It is also important to understand that the £150 limit applies to everyone attending the function, so if your employees bring a guest, the total cost should be divided by the total number of attendees.
If you have more than one office, multiple Christmas parties will still be exempt, provided the combined cost is less than £150 per head.
It’s worth noting that if the cost works out at less than £150 per head, the leftover money could be spent on an additional tax-free staff event, such as a summer barbecue. The event won’t be subject to tax as long as the annual accumulated spend doesn’t exceed the £150-per-head limit.
Christmas parties are the ideal opportunity to reward your staff for all their hard work. However, throwing too good a party could end up being extremely expensive. Where the total cost exceeds £150 per head, the party will be subject to tax and National Insurance. This taxable benefit in kind (BiK) will need to be included in a PSA or reported on the employees’ P11D forms, with the employees having to pay any Income Tax due and the employer covering the National Insurance contributions.
As with Christmas gifts for staff, the £150-per-head limit is an exemption, not an allowance. This means that if you go just a penny over the £150 limit, the total cost of the party will be taxable, not just the excess. In this case, you could ask your employees to make a small contribution to the party in order to bring the cost under the limit.
Remember that a Christmas party will be taxable if it is not open to all staff.
When it comes to VAT, it’s worth knowing that VAT can be recoverable for employee entertainment. (If, however, it is a Christmas party for only directors, partners or sole proprietors and no other staff members, VAT cannot usually be reclaimed.)
Are virtual Christmas parties taxed?
Despite the lifting of the COVID-19 restrictions, more employees are now working remotely. This means it may be more convenient to host a virtual event rather than throw a Christmas party in a physical location.
If you decide to organise a Christmas event in the form of an online quiz or a Zoom get-together, it will be eligible for tax exemption. Bear in mind, though, that to qualify for the exemption, you should keep a record of all the costs — including entertainment and gifts for consumption at the party — to ensure you don’t exceed the £150 exemption limit. You may also need to arrange a register of attendance.
You cannot usually deduct a Christmas gift for a client against your profits. There are, however, some exceptions to this:
- Free samples of your own products are 100 per cent deductible.
- Gifts that promote your business with personalised branding or your logo are tax-deductible up to £50 per person per year, as long as they are not food, drink or tobacco products or vouchers, which receive no tax deduction.
You cannot claim a tax deduction for client entertainment. This means that if clients attend your Christmas party, the costs must be divided between them and your employees. Note that VAT on client entertaining is not recoverable either.
Client Christmas cards that promote your business are tax-deductible, as they are considered an office expense.
An employee benefit will be treated as trivial and won’t need to be reported for tax purposes if it is not given as a reward and there is no contractual entitlement to it. Note that even if the benefit is given each year, it doesn’t mean the employee has a contractual right to it.
If you provide your employees with flu vaccinations, this will be treated as a trivial benefit and won’t need to be reported for tax purposes.
As long as it is non-contractual, worth less than £50 (including VAT and delivery costs) and not for services performed, an employer can give a tax-free Christmas gift to an employee, as it will be classed as a “trivial benefit”. If you give a member of your staff a Christmas gift worth more than £50, it will need to be declared to HMRC on a form P11D or through a PSA. Note that if the individual cost for each employee’s gift can’t be confirmed, you can use an average.
It is important to understand that the £50 limit is not an allowance, which means a Christmas gift that costs £55 would be taxable in full, not just the excess. For gifts worth more than £50, the employee would be responsible for paying tax on it, while you, as their employer, would need to pay the National Insurance.
A cash gift — or Christmas bonus — is taxable as earnings in the usual way. This means it will appear on an employee’s payslip, and, if applicable, both Income Tax and National Insurance will be deducted. Cash vouchers are treated in the same way as cash gifts. The employee will be taxed on the face value of the voucher, no matter how much the employer paid for it. A non-cash voucher will be treated as a trivial benefit if it is worth less than £50. Non-cash vouchers worth more than £50 are subject to tax and must be reported on the employee’s P11D form or included in a PSA.