Showing appreciation for your employees’ efforts is a vital part of running a successful business. If they feel valued, their engagement will be greater and consequently, they will produce better results. It’s a win-win situation.
As Christmas edges closer, employers will be considering how they can reward their employees for their year’s endeavour. They may wish to buy presents or hold a staff party. This decision balances providing a gift/event that will best please their employees, whilst also being financially sensible, particularly if their workforce is large.
If this applies to you, what follows are the relevant tax implications you may wish to think about…
Gifts
When giving presents to your employees, it’s worth knowing that you do not need to pay tax, National Insurance, or pass information to HMRC when providing ‘trivial benefits.’
This is applicable to items/perks that:
- Cost you £50 or less to provide
- Are not cash or a cash voucher
- Are not a reward for their work or performance
- Are not in the terms of their contract
It’s worth noting that HMRC can challenge any benefit that is regularly provided using the exemptions above. This is because the items/perks can be seen as ‘legitimate expectation’ that flies too close to being a performance reward, or given so often as to be routine.
Tax must be paid on any benefits that don’t meet all these criteria.
However, you can still offer a gift without a taxable benefit arising for the employee. In these situations, gifts would need to be included in a PAYE Settlement Agreement (PSA). This is where the employer pays the tax due and National Insurance on the benefit for the employees, on a grossed-up basis. You need to apply for a PSA before 6 July after the end of the tax year in which the benefit arose.
Additionally, if you provide trivial benefits as part of a salary sacrifice arrangement these will not be exempt. This will result in the employee having tax and National Insurance consequences, as well as the business having to pay National Insurance itself.
Whichever amount is higher from the options below must be reported on form P11d:
- the salary given-up
- the amount you paid for the trivial benefits
‘Close companies’
A ‘close company’ is a limited company that’s run by 5 or fewer shareholders. There are special rules regarding benefits for those working within these organisations.
If you are a director of a close company, you can receive trivial benefits up to an annual cap of £300.
Should a member of family (or household) of an employee, who is not themselves an employee receive benefits, this will count toward the £300 exempt amount.
Should a member of the family (or household) of an employee, who is also an employee receive benefits, the £300 cap is also applicable.
Events
If you’re thinking of hosting an event for your employees, such as a Christmas party, there are some possible actions you can take to make this more tax effective.
The information you must report to HMRC and what tax to pay depends on:
- Whether it’s an annual event
- Whether it’s open to all of your employees
- Whether it costs more than £150 per head
- How many events you provide during the tax year
- If the employee is a director, and how much they earn
To be exempt of tax, your event(s) must be annual, open to all employees and cost less (or equal to) £150 a head including VAT.
Total cost is calculated by adding together all expenditure involved with the event, such as venue, food, drinks and even includes overnight accommodation or transport costs provided (including VAT). Cost per head is determined by dividing the total cost by the number of attendees, as well as any non-employees who may be there.
You can host multiple events that are tax exempt across the year if their combined cost is less than £150 per head.
However, you must report and pay on the full costs of any events that go over this limit, even if they cost less than £150 per head individually. In this case, only one event is eligible for the exemption, with the other being reported. Should this be relevant to you, it makes strategic sense to report the cheaper event to reduce your liabilities.
Need some guidance?
Finding that balance between rewarding your employees and keeping things affordable can seem like a complex issue.
If you require some assistance with any of the topics covered in this article, please contact us and we’ll be happy to help. Alongside this, read how our payroll and P11d solutions could be useful to you and your business.
