Are you thinking about rewarding your employees with a Christmas gift this year?
As it turns out, certain gifts to staff at Christmas are tax-free if structured correctly. Since April 2016, employers have been allowed to provide their directors and employees with certain “trivial” benefits-in-kind. The rules were brought in as a simplification measure, so that these benefits do not need to be reported to HMRC and are tax-free for the employee.
There are, of course, a number of conditions that need to be satisfied to qualify for the exemption, which we explain below.
Which employee gifts are tax-free?
For the tax-free exemption to apply, the following conditions must be met:
- The cost of providing the benefit does not exceed £50.
- The benefit is not cash or a cash voucher.
- The employee is not entitled to the benefit as part of any contractual obligation, such as a salary sacrifice scheme.
- The benefit is not provided in recognition of particular services performed by the employee as part of their employment duties (or in anticipation of such services).
So, what does that all mean in practical terms?
It means that you can give your employees small, thoughtful gifts, such as a bottle of wine, a box of chocolates, or a store voucher, to mark key occasions. And here’s the thing, this doesn’t just apply at Christmas – you could also provide a gift on an employee’s birthday, to celebrate their wedding, or even religious festivals like Eid or Diwali.
As long as each gift costs £50 or less, isn’t cash or a cash-equivalent voucher, isn’t part of their employment contract, and isn’t a reward for doing their job, then it qualifies as a trivial benefit and does not create a tax liability for either you or them.
Is there a limit?
Yes and no!
For regular employees, there is no limit to the number of trivial benefits an employee can receive in a tax year, as long as each one individually meets the criteria.
However, for directors of ‘close’ companies (typically those controlled by five or fewer shareholders), there is an annual cap of £300 on trivial benefits.
What if the value of the gift exceeds the tax-free threshold?
If your gift exceeds £50, even by a single penny, the gift no longer qualifies as a trivial benefit. As a result, the entire amount becomes a taxable benefit.
This means it may need to be reported to HMRC via a P11D form, and both the employee and employer could face additional tax and National Insurance charges.
What about Christmas bonuses?
We get this question a lot. Towards the end of the year, if a company has done well, it may reward staff with a cash bonus.
A bonus payment typically does not fall under the trivial benefits scheme, as it contravenes the following conditions:
- The benefit is not cash or a cash voucher.
- The benefit is not provided in recognition of particular services performed by the employee as part of their employment duties (or in anticipation of such services).
A bonus, whether it’s paid at Christmas or any other time, is considered a reward for services performed. That makes it part of an employee’s earnings, and as such:
- It must be added to their salary for PAYE purposes.
- You must deduct Income Tax and National Insurance through payroll as usual.
That said, bonuses are generally considered allowable business expenses. That means they can be deducted from your company’s taxable profits as a means of managing or reducing tax liabilities. If you want more advice on that, speak to our corporation tax specialists.
Need more information?
Gifts are a simple and tax-efficient way to show appreciation for your team. You just have to make sure you stay within the rules. But the tax-free benefits don’t stop there, you can also provide parties and social events throughout the year, to the tune of £150 per head. You can find out more about that here: Tax Relief For Staff Parties And Annual Functions
If you need more guidance on Christmas gifts for employees, please don’t hesitate to get in touch with us. We support businesses with a wide range of services, including end-of-year accounting, tax advice, and R&D claims.