Christmas gifts and bonus payments

3rd December 2018

It’s that time of the year when you may be thinking about how to reward your employees for their support and help during the year. Some of the gifts you may have in mind are a Christmas meal, a bonus, bottle of wine or some chocolates. Whichever gift you decide on, we are here to make you aware of the tax and national insurance implications of what you decide to give them.

Christmas bonuses

If you decide to give your employees a Christmas bonus, this amount must be processed through the payroll just like any other bonus or additional pay you give them. It is a taxable benefit and must also have national insurance contributions deducted. Additional to the above, pension contributions may be based on this amount dependent on whether your scheme has been set up to have contributions based on all earnings.

VAT claim

You can claim the VAT on the cost of your Christmas party or Christmas meal but if you also pay for the guest of any employee, you would not be able to claim the VAT on the guest portion of the cost. If your Christmas meal is only open to partners or directors, you cannot claim back any VAT. VAT can also be claimed on trivial gifts up to £50.

If anyone attends your Christmas meal or Christmas party who is not an employee of your business, the cost of that social entertainment for that person is not an allowable business expense and cannot have VAT claimed on the expense either.

Please note, no entertaining or gift expense is allowable if it’s purely for the directors, partners or business owners.

Gifts

If you decide to give your employees a gift, this is not taxable if it costs less than £50. This is considered a trivial gift by HMRC, but it must not be cash or a cash voucher and it must not be in the terms of their contract that they will receive a gift at Christmas. If you plan to give your employees a gift which would not be considered trivial, this must be reported on a P11d and Class 1A national insurance contributions paid on the value of the benefit.

If you do decide to give your employees a Christmas gift which is not considered trivial by HMRC, you can choose to have a PAYE Settlement Agreement with the HMRC. This is where you make an annual payment to cover the tax and NI implications of larger gifts so that the employees do not have to pay the tax and NI on the benefit themselves.

If you decide to treat your employees to a meal or a Christmas party, it is not taxable if you do not spend more than £150 per person in one year. If you have had a summer event as well, the cost per head of that must also be considered as £150 is the maximum amount you can claim against tax on social events in a year. If your second event takes you over the £150 per head limit, you will not be able to claim any of the cost of the second event. The social event must be open to all staff for the expense to be allowable and not just to Directors, Partners or Managers.

If you have any questions  about paying Christmas bonuses or providing gifts, please do not hesitate to get in touch.