Christmas benefits and bonuses – what employers need to know

As the Perkbox survey reveals, cash bonuses and other benefits can be a good way to boost staff morale at Christmas.  However, some gifts and benefits can have various tax and other implications that employers need to be aware of so they can make the right decisions about how to reward their staff at Christmas.

Taxation on bonuses and vouchers

Employers must remember that any bonuses paid to staff counts as earnings, so they will have to deduct and pay PAYE tax and Class 1 National Insurance through payroll.  In certain cases there will be tax implications for employees when receiving non-cash bonuses, eg if you give your employee something they can easily convert to cash.

Vouchers exchangeable for cash count as earnings, so employers will need to:

  • add their value to the employee’s other earnings
  • deduct and pay PAYE tax and Class 1 National Insurance through payroll

Vouchers that are exchangeable for goods and services only (non-cash vouchers), are considered a taxable benefit, so employers will need to:

  • report the value on the employee’s P11D form
  • add the cost of the vouchers to the employee’s earnings when deducting Class 1 National Insurance (but not PAYE tax) through payroll

So as not to cause disappointment to staff when opening their last payslip before Christmas, employers should, make it very clear to what deductions will need to be made in relation to bonuses, vouchers, or other benefits.

The Christmas party – is it taxable?

Normally, social functions provided by an employer for employees are chargeable to tax as employment income. However, s.264 of the Income Tax (Earnings and Pensions) Act 2003 contains an exemption from the charge to tax. The exemption applies to an annual party, which includes a Christmas party or similar annual function provided for employees, that is either available to employees generally, or available to employees generally at one location, where the employer has more than one business location.

If the employer provides one annual function for employees, no charge to tax arises provided that the average cost of the event per head does not exceed £150. The cost of the function includes VAT and the cost of any employer-provided transport or overnight accommodation. To calculate the cost per head, the employer should divide the total cost of the function by the total number of people who attended, including any non-employees, and not by the total number of people actually invited.

It should be noted that the £150 limit is not an allowance, so If the average cost per head of a function exceeds £150, the full value of the benefit provided will be taxable. Also, if the employer provides two or more annual functions, no charge to tax arises provided that the costs per head do not exceed £150 in aggregate. If the total cost per head goes over £150, whichever function best utilises the £150 is exempt and the other functions are fully taxable.

When the Christmas bonus becomes a contractual right

Unless this is an explicit term in their contract of employment, there is no requirement for employers to pay their staff a Christmas bonus.  However, if an employer has paid a Christmas for a significant number of years, so that there is a long-standing or established custom or practice to pay a Christmas bonus, it may become an implied term of the employee’s Contract of Employment. In general, this will be the case where the practice

  • is clear and certain
  • is fair and reasonable
  • has been going on for a long period of time (the law does not set out a specific length of time)
  • is known to employees and they have a reasonable expectation of receiving it
  • has been consistently applied to employees.

Receipt of Christmas gifts from suppliers and/or customers

Christmas is the time when many organisations start receiving gifts from grateful suppliers/customers. Whilst we all enjoy the odd box of chocolates, it’s worth reminding staff of what is an acceptable gift.

It’s important for all organisations that the acceptance of these gifts does not give the appearance that they may be unduly influenced when making decisions.

You should remind employees of your rules on gifts. For example, all gifts and hospitality received, of whatever value, must be entered in a register and no personal gifts of a value in excess of set limit should be accepted without the express permission from their line manager.

    • Be clear that they are welcome to keep or share any gifts of minor value (e.g. less than £10) that they receive, but that they will need to inform a manager about any larger gifts, or gifts where the intention of the gift is questionable (e.g. to encourage you to agree a proposal/sale)
    • Rather than assuming £10 is the acceptable limit, make sure you check your own policy and inform staff accordingly.

If you don’t have an Anti-Fraud & Bribery Policy or Guidelines around receiving gifts, this could be a good time to put something in place.  If you need advice or support in relation to this, or any other HR issue, the PBS Team would be pleased to help, so give us a call on 01925 425 857, send an e-mail to enquries@peoplebasedsolutions.co.uk or Click Here to visit our website.

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