Tax implications of buying Christmas gifts for staff

French Duncan | 08 December 2021


As we had hoped to inspire a return to a normal Christmas environment this year, the two common themes of tax and Christmas (well maybe not that common) spring to mind.

As employers attempt to be a bit more inventive with how they reward staff at this time of year, especially as we find ourselves potentially leaning more towards online interactions for the second year running, here is a quick rundown of what the income tax and PAYE implications and reporting requirements are for employers in the 2021/2022 tax year.

Christmas Parties

What’s the position?

Employers providing a Christmas party (in person or virtually) for employees will not give rise to a taxable benefit for the employees as long as the following conditions are satisfied:

  • The costs of the party (including any other social functions held throughout the same tax year) do not exceed £150 (including VAT) per head;
  • It is open to all employees (or all employees at one location where there are multiple employer locations); and
  • It’s an annual function, routinely held, and not a one-off event.

Generally, this should mean that no income tax or PAYE charge should arise on the employees.

The £150 per head

It is worth drawing out that the £150 per head threshold includes all costs associated with throwing the party e.g. transport, food, drinks and accommodation, and is per attendee and not exclusively per employee.

Therefore, for these purposes, employees are allowed to bring guests which would reduce the cost per head but, this is only likely to appeal if employers are feeling particularly generous and want to share the festive cheer with non-employees.

Pitfalls and Reporting requirements

That said, if the employer throws a particularly extravagant party which costs, £200 per head, the taxable benefit for each employee will be the full £200 and not just the excess over £150 – this is an all or nothing benefit.

In such a case, the income tax and PAYE liability can be collected via:

  • P11d – The employee pays the income tax and the employer pays the Class 1A NIC liability.
  • PAYE Settlement Agreement (PSA) – The employer pays the grossed-up income tax and Class 1A NIC liability.

Gifts

What’s the position?

The tax position will depend upon the nature of the gift that employers (and even third parties) provide to their employees. Focussing on three categories, as follows, the position will be:

  1. Cash Bonuses and cash vouchers
  • What is it? Cash or cash vouchers i.e. a voucher that can readily be converted into cash.
  • Tax: These are treated as earnings and so taxable in the normal way i.e. income tax and PAYE apply on the payment in the month paid.
  • Reporting: This would be collected through the payroll in the month of the payment.
  1. Gifts and non-cash vouchers (goods and services only)
  • What is it? A physical gift or vouchers which are exchangeable for goods and services only.
  • Tax: A gift may fall under the trivial benefits (see below) or, if it is a non-cash voucher, be a taxable benefit in kind which is subject to income tax and Class 1A NIC.
  • Reporting: If it is a trivial benefit, there is no reporting requirement for the employee or the employer. If it is a non-cash voucher, the benefit will need to be reported through a p11d. Alternatively, there may be the option of the employer entering into a PSA.
  1. Trivial Benefits
  • What is it? There is a statutory exemption for trivial benefits in kind costing less than £50 (including VAT) per employee. This is in addition to the £150 per head detailed above in respect of employee functions. Additionally, the following conditions must be satisfied:
    • The gift is not cash or a cash voucher – a non-cash, gift voucher which can be spent in a retail store should be acceptable.
    • The gift is not provided under a salary sacrifice or other arrangement.
    • The gift is not provided in recognition of past or future services performed by the employee - a gift on the occasion of Christmas should meet this requirement.
  • Tax: On the basis, the above conditions can be met, no income tax or NIC liabilities will arise on of the benefit provided. However, this is an all or nothing benefit, so exceeding the £50 limit by a 1p would result in the whole benefit being taxable.
  • Reporting: Similarly, meeting the same conditions means no reporting requirements for employee or employer.

Thinking ahead – Christmas 2022

It might be too early to be planning for Christmas 2022 but, with the introduction of the new Health and Social Care Levy from April 2022, Christmas gifts made next year which are subject to income tax and PAYE will become a little bit more expensive for employers as the additional 1.25% rate applies on the value of the benefits provided.

How can we help?

As always, planning ahead and understanding the tax implications and reporting requirements before acting ensures employers can fully understand the consequences of offering such events or gifts.

We would be happy to discuss the above in more detail to maximise the tax efficiency for employers and employees or assist with any annual filing requirements, such as payroll, p11d’s or PSA, which arise from such gifts.

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