Christmas is just around the corner, which means it’s time for an annual refresher on the tax exemptions surrounding Christmas gifts, bonuses, and office Christmas parties.
Though these rules apply to all businesses, in this article we are going to focus on how small and medium-sized enterprise (SME) owners should think about these employee benefits in order to maximise the value (and fun) for your employees. Here’s what you need to know to keep your tax liabilities to a minimum.
You do not pay tax on Christmas gifts that are considered to be ‘trivial benefits’. In order to be a trivial benefit, a benefit must cost £50 or less and cannot be a reward for their work or performance. It also cannot be cash or a cash voucher.
Gifts that are not trivial are taxed under Class 1A National Insurance, and if the gift can be resold or exchanged for cash then it may be taxed as earnings.
Please note that if your company provides trivial benefits as part of a salary sacrifice arrangement, then you will report it on form P11D on the salary given up and the worth of the trivial benefits. These rules apply to arrangements made after 6 April 2017.
If you’re a director of a ‘close’ company, meaning a limited company run by five or fewer shareholders, then you cannot receive trivial benefits worth more than £300 in a tax year.
Cash bonuses are always going to be taxed, regardless of their size. Any cash gift you give to an employee will count towards their standard earnings and will be taxable under PAYE tax and Class 1 National Insurance Contributions, along with their other earnings.
You may also give tangible and intangible items to your employees as a Christmas bonus, but you will need to declare it on your end-of-year tax form (form P11D) and pay class 1A National Insurance Contributions on the value of the benefit.
In order to ensure you keep your tax liabilities to a minimum when hosting a Christmas party for your employees, you’ll need to keep in mind:
- The party must be an annual event, not just a rare occurrence.
- The total cost of all parties you host in a given tax year must not exceed £150 per head, including VAT.
- You can either allocate £150 per head for a grand Christmas party or split the amount across a few parties in a given tax year.
- The amount £150 per head can include food & drink, travel expense, and other party-related items.
- If your annual parties do exceed £150 per head, your employees will have to pay tax on the entire amount, not just the value over £150.
- You must invite every employee working for your business or, for a larger SME, every employee working at a particular location.
Experienced tax accountants
Tax is a complex issue but as professional tax accounts, we’re here to help and provide the most tax efficient way to run your business, from Christmas party allowance to taking the money out of your small business, among other tax-related issues.
Contact us today on 020 8108 0090, or get in touch with us via our contact page to arrange a complimentary, no obligation meeting.
If you found this useful, you might also like: