Woman sat at desk being passed a Christmas present
Give the gift of tax-free Christmas cheer

For employers looking to offer a little extra to their employees over Christmas, it’s important to make sure that you follow HMRC’s rules on gifts and parties to avoid any unpleasant tax surprises in the New Year. 

Christmas gifts

Employers can make tax-free gifts to employees on occasions such as Christmas by taking advantage of the trivial benefits rule. This provides a statutory exemption from income tax and national insurance for employees and employers provided that:

  • the cost of the gift, including VAT, does not exceed £50 per employee;
  • the gift is not cash, or a cash voucher (a voucher which can be exchanged for cash);
  • the gift is not provided under a salary sacrifice or other contractual arrangement; and
  • the gift is not provided in recognition of particular past or future services performed by the employer.

While these conditions are usually straightforward, there are a few points of detail employers should bear in mind.

Firstly, this is an all or nothing exemption - if the cost of a gift exceeds £50 then the full value is taxable under the usual benefit in kind rules. But if the benefit is provided to a group of employees and it is impractical to work out the exact cost per individual, then the gifts can still be counted as trivial provided that the average cost comes in under the £50 limit.

Secondly, employers are not permitted to divide a larger gift into several smaller ones to try and keep within the individual gift limit. For example, providing a gift card of £20 would initially fall within the trivial benefit rules, but topping up the same card with £20 a further two or more times in a tax year will take the total of the benefit over the £50 limit. At that point, the whole series of gifts is treated as a single benefit which does not meet the trivial benefit conditions. The result is both the original gift and the top-ups will be taxable.

Employers should also be careful of giving more than one gift for the same purpose. While a bottle of wine at £30 and a Christmas turkey at £25 are individually under the £50 limit, if both are intended as Christmas gifts, then HMRC will consider the two gifts to be a single Christmas gift with a combined value of £55 – which, once again, falls outside the trivial benefits rules.

Directors and office holders of close companies (companies owned and controlled by five or fewer participators, as is the case in many family companies) and employees related to them also need to be extra careful as they are subject to a further restriction. For these individuals, the aggregate value of any trivial benefits received in any tax year must not exceed a cap of £300.

The Christmas Party

When inviting staff to any work event it is important to remember that such functions can potentially create a taxable benefit in kind. Since attendees are unlikely to appreciate a tax bill at the end of the night, it is important to ensure that a few conditions are met.

The basic conditions for a tax-free party are:

  • The party must be annual;
  • The event must be available to all employees; and -
  • The cost per head must not exceed £150.

Once again, there are a few points of detail employers need to be aware of.

The annual test

The requirement for the party to be annual – rather than a specific relief for a Christmas party - means that if your firm chooses to hold a regular summer function instead (or potentially as well as a Christmas party) then, provided the other tests are met, one or even both could potentially be tax-free for staff.

One-off celebrations - such as a party to mark an anniversary to celebrate 20 years of trading – do not qualify for this specific exemption.

The all-employees test

The all-employee rule is modified if the employer has multiple sites, but it must be available to everyone at that location. Smaller parties grouped in other ways – such as by department – can be held if preferred, as long as all staff at that site have the opportunity to attend one of the events.

If the event is only for selected staff so that the general exemption cannot apply, then it might be worth considering if the trivial benefits rules above might apply instead where the average cost is under £50/head.

The cost test

Finally, to establish if you are within the £150/head limit you need to consider the total cost of providing:

  • The party or function, and
  • Any transport or accommodation provided for those attending (including non-employees) and
  • Any related VAT on the above.

To establish the cost per head the total is then divided by the number of people attending. Any non-employees, such as spouses or partners of employees, who attend can be included in the headcount.

Provided the cost per head comes to £150 or less, then the party will be exempt. If the cost is £150.01 per head or more, then the event will be a taxable benefit in kind for staff. The £150 is an exemption, not an allowance, and if it is exceeded, then the whole cost is taxable.

Where the cost exceeds £150 the benefit must be reported on a P11D for the attending employees. The employee’s benefit must also include the cost of any attending spouse/partner who is not an employee in their own right. The employer must also pay Class 1A NICs on the total benefit amount following the end of the tax year. Alternatively, the employer can bear all of the tax themselves by including the benefit in a PAYE Settlement Agreement.   

Multiple events

Where an employer holds more than one annual event, for example a Christmas party and a summer function, it is possible for all of them to be exempt provided that when the cost per head of each event is added together the total is less than £150. For example, a Christmas party costing £75 per head together with a summer event of £50 per head come to less than £150 per head and would both be exempt.

If the employer also holds a third event for £45 a head in the autumn, then the three events combined would be over the limit at £170. In this case the employer is permitted to allocate the exemption to the Christmas and summer party, and only the autumn event would be taxable.

For any events not covered by the £150 exemption, consideration should be given to whether the trivial benefit rules might apply or if the benefit could be included on a PAYE Settlement Agreement.   

 

This article reflects the position at the date of publication (19 December 2023). If you are reading this at a later date you are advised to check that that position has not changed in the time since.    

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