As the festive season approaches, many employers will be planning how best to show appreciation for their staff after another year of hard work. Whether it’s a Christmas party, thoughtful gifts or seasonal bonuses, these gestures can significantly boost morale and create a positive working environment.
The good news is that with careful planning and an understanding of HMRC rules, it’s entirely possible to reward your team in ways that are tax-efficient for both your business and your employees.
Whitley Stimpson Payroll Manager, Tracy Gill said:
“Christmas is the perfect time to show your appreciation for your staff, and there are some excellent tax exemptions available that many employers don’t fully utilise. The key is understanding the rules and planning ahead so your festive generosity doesn’t create an unnecessary tax burden.”
When it comes to hosting a Christmas party or annual social event, HMRC provides a useful exemption that allows employers to spend up to £150 per head without any tax or National Insurance implications. This annual function exemption applies to events that are open to all employees and can include everything from venue hire and catering to entertainment, transport and even overnight accommodation. This exemption can be used for any annual social function throughout the year, so it could cover both a summer barbecue and a Christmas celebration, provided the combined cost per person doesn’t exceed £150.
When it comes to giving gifts to your staff, the trivial benefits exemption allows you to provide non-cash gifts worth up to £50 per person without creating any tax liability. Think Christmas hampers, gift vouchers for shops or restaurants, or bottles of wine. The exemption can be used multiple times throughout the year for different occasions, not just Christmas.
Tracy Gill said:
“The trivial benefits exemption is wonderfully flexible and there’s no annual limit on how many times you can use it, as long as each gift meets the criteria. It’s a genuine opportunity to show ongoing appreciation for your team throughout the year.”
However, it’s important to note that this exemption only applies to non-cash gifts. If you’re considering giving your staff a Christmas bonus, this will be treated as earnings and must go through your payroll system with income tax and National Insurance deducted. Similarly, cash vouchers or gift cards that can be exchanged for cash are treated as taxable earnings.
While these exemptions offer excellent opportunities, there are pitfalls to watch out for. The £150 per head limit for annual events is a threshold, not an allowance. This means if your Christmas party costs £151 per person, the entire amount becomes taxable, not just the excess. When calculating the cost per head, you must include VAT. Similarly with gifts, if you spend £51 the entire cost becomes a taxable benefit.
Proper record-keeping is essential to demonstrate compliance with HMRC rules. If you do exceed the thresholds, benefits must be reported either on P11D forms or through a PAYE Settlement Agreement. With thoughtful planning and careful attention to the rules, the festive season is a time to reward your staff generously whilst remaining tax efficient.
For further information please contact Tracy Gill tracyg@whitleystimpson.co.uk or 01295 270200.