Bonuses, gifts, and Christmas parties

Payroll considerations for all the festivities

Sorting out the fun stuff

Bonuses and gifts
If your employees have been working hard all year, no doubt you’d like to recognise this with a big ‘thank you’ bonus or gift. However, you’ll need to be careful, as many come with all sorts of payroll implications…Depending on the type of bonus your business chooses, you may have to report them to HMRC, and deduct and pay tax and National Insurance on them.Cash
Any kind of cash or cheque you give to your employees as a Christmas bonus counts as earnings. Note this can include vouchers that are worth their face value if there’s a wide choice of spending options. E.g. a £10 voucher that can be spent by the employees at any shop.

For cash bonuses, you will need to:

Add the value of the cash to the employees’ other earnings

Deduct and pay Pay As You Earn (PAYE) tax and Class 1 National Insurance through payroll

For reporting, you'll need to report the bonus amount paid to the employees. All directors and employees are taxable on any cash gifts that they may receive from their employer.

Christmas gifts - did you know?

When someone other than the employer gives cash as a gift, if it's both a widespread custom for presents to be given, and it's understood the present is in relation to their employment, then it counts as taxable earnings.

Physical goods

If the goods can’t be counted as trivial benefits (see below) you must:

Report them on form P11D
Pay Class 1A National Insurance on the value of the benefit.

So this means:

For goods with no resale value, use the amount the goods cost you
For goods with cash resale value, use whichever is the higher of: the resale value, or the amount the goods cost you

What is a trivial benefit?

You won’t have to pay tax on a benefit for the employees if ALL of the following apply:

It cost the business £50 or less to provide
It isn’t cash or a cash voucher
It isn’t a reward for the employees’ work or performance
It isn’t in the terms of their contract

NOTE: Employees paid less than £8,500 per year do not contend that any liability arises on small gifts in kind given by employers. For goods given by people other than the employer, see EIM21715.

Christmas parties

What we all want to know is - are Christmas parties taxable?

HMRC provides tax relief for ‘annual events’. including parties like your Christmas bash. But they have to meet these three criteria to qualify:

The party must include all employees, i.e. all staff must be invited to attend in order for it to qualify. A department-only party doesn't count!
The party must be an annual function. A Christmas party qualifies, as would a yearly summer barbeque. But one-off events would not be tax deductible.
The cost of your annual event doesn't exceed £150 per employee. That's the total for the year, so for example if you've had an all-employee summer barbeque, both events together can't come to more than £150 per person.

Employee Benefits: the gift that keeps on giving

Perhaps you’d like to steer clear of bonuses and gifts and the tax complications they bring?

Instead, why not provide an employee benefit that your staff can enjoy all year! This might be the introduction of a flexible working policy or giving them their birthday off work.

Or, you may choose to partner with an employee benefits provider who will give you and your staff access to fun – and affordable – employee benefits, such as discounts and vouchers. Providing benefits are a great way to improve staff retention and attract staff when you come to recruit.