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Give a Gift of Tax-Free Christmas Cheer

As the festive season approaches, it is traditional for tax advisers to remind employers how to avoid leaving any tax-traps under the tree. By following a few simple rules, employers looking to offer a little extra to their employees over Christmas can make sure they avoid any unpleasant tax surprises in the New Year.

Christmas gifts

Employers can make tax-free gifts to employees on occasions such as Christmas, birthdays or other celebrations by taking advantage of the trivial benefits rule. This rule 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 any particular past or future services performed by the employee.

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

All or nothing

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. If the benefit is provided to a group of employees and it is impractical to work out the exact cost per individual, the gifts can still be counted as trivial if the average cost comes in under the £50 limit.

Do not divide to conquer

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 £30 would initially be exempt under the trivial benefit rules, but topping up the same card with £30 later on in the same tax year will take the total of the benefit over the £50 limit. In this case, both gifts will be treated as a single benefit which does not meet the trivial benefit conditions. The result is both the original gift and the top-up will become taxable. But if the second gift had been a voucher for a different retailer, it would have been treated as a separate benefit, so both amounts could have been tax exempt.

Employers should also be careful of giving more than one gift for the same purpose. Taken separately, a bottle of wine at £30 and a voucher for £25 each fall under the £50 limit. However, 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. This will then fall outside the trivial benefits rules and be taxable.

Close companies

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.

These individuals are subject to a further restriction on trivial benefits – the aggregate value of any trivial benefits received by them or members of their household in any tax year must not exceed £300.

Summary

As long as employers stick to the letter – and spirit – of the rules, it is possible to gift employees a bit of Christmas cheer without any risk of the taxman playing Scrooge.

 

This article reflects the position at the date of publication shown above. 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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