A Guide to Navigating Christmas Tax and Other Benefits Exemptions Effectively this Holiday Season

17th November 2023

It’s getting towards that time of year when employers like to spread some festive cheer and thank their staff for all their hard work throughout the year. This tends to come in the form of parties, hampers, or payrolled bonuses, however there may be other ways in which employers choose to celebrate the season. Here are some things for both employers and employees to bear in mind when it comes to the taxation of these Christmas extras:

Tax rules for Christmas Cash bonuses:

Cash bonuses are not only subject to Income Tax but are also considered earnings for National Insurance, Student Loan repayments and, in some cases, pension contributions. Employers will often pay these out gross in advance of the December pay run and so it’s important for employees to realise they will effectively have to pay some of this back in the form of additional deductions from their normal monthly salary.

Let’s say an employee with an annual salary of £38,000 and a Plan 1 Student Loan receives a bonus of £1,000 (gross). This will be added to their normal gross pay in their employer’s December pay run and so the full amount will be subject to Income Tax at 20%, Class 1 Primary National Insurance Contributions of 12% and Student Loan repayments of 9%. The employee will therefore have an additional £410 deducted from their December pay and so this reduces the amount received in respect of the bonus to £590. The employer will also have to pay Class 1 Secondary National Insurance contributions at 13.8% on the bonus and so the total cost to them, before tax, will be £1,138.

Work Christmas party:

Christmas parties are something that both employers and employees are unlikely to realise could have any tax consequences.

Social functions are exempt from tax provided all three of the following conditions are met:

  • It is open to all employees
  • It is an annual event, such as a Christmas party or summer barbecue
  • Costs no more than £150 per person per year (VAT inclusive)

If the conditions to qualify for the exemption aren’t met then a benefit-in-kind (BIK) arises for the full amount (not just the element above £150) which the employer would need to report on Form P11D and pay Class 1A National Insurance at 13.8%. Employees would also be liable to Income Tax on their share of the benefit.

Often employers would enter into a PAYE Settlement Agreement with HMRC in order to pay the Income Tax and National Insurance on behalf of employees, but naturally this does increase the cost for employers and create additional admin.

Trivial benefit:

Vouchers, hampers and other gifts are often given at this time of year.  The default position is that these are taxable benefits, charged on the employee and employer.  Usually vouchers and gifts would need to be reported on a Form P11D, though there may even be a need to process through a payroll.

There is an exemption where gifts/vouchers can be given without triggering a tax obligation and instead are treated as ‘Trivial Benefits’.  These do not require a P11D and can be given to employees where:

  • It costs £50 or less to provide
  • It isn’t cash or a cash voucher
  • It isn’t a reward for performance
  • It isn’t contractual

With the exception of directors of close companies there is no limit to the number of trivial benefits an employee can receive, however this is largely restricted by the “isn’t a reward for performance” criterion as there are only so many occasions in a year that such a gift would be warranted (e.g. birthday, Christmas etc.). For directors of close companies, the total value of trivial benefits received in a year is restricted to £300.

In summary, Christmas provides employers with an opportunity to celebrate free of tax and National Insurance provided certain conditions are met. It’s worth bearing in mind though that cash or cash benefits are almost always considered earnings and so are subject to Income Tax and National Insurance, regardless of the occasion.

If you have any questions on the taxation of bonuses, benefits or any other matters please do not hesitate to get in touch with a member of our team.

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