The Christmas season of fun and festivities wouldn’t be the same without presents and parties, so make sure you know what the tax implications are before organising functions or giving gifts to your employees.
It’s the time of year when employees look forward to an extended break and, if they’re lucky, a Christmas party and a little gift or two. But what do employers need to be aware of when it comes to providing their employees with benefits over the festive period?
Christmas Employee Perks: Parties
A common perk for employees is an invitation to a Christmas jolly. This allows employers, large and small, to get all staff members together to celebrate the festive season. But what do employers need to be aware of to ensure this perk doesn’t become taxing on their employees?
- How much can an employer spend: A tax exemption is available for annual functions, up to £150 per head. This amount isn’t limited to employees only, so can include partners, children and so on.
- How often can they be held: The exemption applies to “parties and functions”, so more than one event can occur in a tax year: if only one event takes place, the cost per head must not exceed £150 if multiple events take place (for example, a summer barbeque and a Christmas party) the cost per head must not exceed £150 in total for both events.
- What is covered by the exemption: The cost per head of the event must include: the value of the event itself, any transport provided, any accommodation provided plus any VAT incurred.
- What if you go over the £150: If multiple events take place and the cost per head exceeds £150 combined, then only one of the events can be covered by the exemption. Using the above example to highlight this, if the summer barbeque cost £50 per head, and the Christmas party cost £110 per head, the employer would be savvy to use the exemption for the Christmas party, and the summer barbeque would need to be dealt with separately.
Christmas Employee Benefits: Perks
If because of Covid or some other reason, a party isn’t held, you may consider gifts. If employers wish to provide a gift to their employees to celebrate the festivities, then utilising the trivial benefit tax exemption may be for you. But be aware, there are four conditions that must be met for the exemption to apply:
- The gift is not in cash or a cash voucher
- The cost of the gift does not exceed £50
- The gift isn’t provided as part of any contractual obligation (including under salary sacrifice)
- The gift isn’t provided in recognition of services performed, or to be performed, by the employee.
You will also be pleasantly surprised to learn that there is no limit on the number of gifts that can be provided to employees throughout the tax year. Typically, the gift would be triggered by an event, for example, a birthday, Christmas or the birth of a child. However, for directors of close companies, the rules are slightly different, in that they can’t receive trivial benefits of more than £300 in a tax year.
By using the trivial benefit exemption in the period leading up to Christmas, you could provide your employees with a turkey or a Christmas ham, a gift hamper, bottles of wine or a magazine subscription. The possibilities are endless, so if you wanted to be really generous, you could gift a separate gift on say each of the ten days leading up to the big day, providing you meet the above four conditions.
Christmas Employee Perks: Big Spenders
If you really want to spoil your employees this festive season, and wish to spend over the trivial benefit/gift exemption of £50, what are the possible options and their consequences?
- The first option would be to report the cost of the event or gift to HMRC as a taxable benefit in kind. This would be done via a P11d, or through RTI if you’ve registered for payroll benefits. This results in a tax charge for the employee, and a class 1A NIC charge for the employer.
- I’m certain no employee would want to pick up the tax bill for attending an event or receiving a Christmas gift, so the second option would be for employers to have the event or gifts covered on a pay-as-you-earn (PAYE) settlement agreement (PSA). A PSA allows employers to cover the tax and NI due on minor, irregular or impracticable expenses or benefits provided to employees. By choosing this option, the employer does need to be aware that they’ll be covering the tax due, based on the employee’s rate of income tax.
Tax Accountant’s view
Having read this Blog, you may be thinking thar HMRC are being quite generous, but in my opinion, they are behaving more like Ebeneezer Scrooge, as the spending limits have not risen in over 10 years and really should around £250 and £85 respectively, to have kept pace with inflation.