With less than 50 days until Christmas, many businesses are busy planning Christmas events and gifts to reward their staff and celebrate the end of the year—but leaving an employee with a tax bill for a party or a gift would be an unwelcome Christmas present. Here is a roundup of what an employer can spend and what to do if you overindulge!
Christmas Events
There is an income tax exemption for each employee for annual functions; this covers all functions during a tax year (6 April to 5 April), not just the Christmas party. The conditions for the exemption are:
The function must be available to all employees generally (or all employees in one location where there is more than one location).
And it must be an annual function (e.g. Christmas party, summer barbecue). A 25th anniversary party wouldn't qualify, as it is not an annual event.
The exemption is £150 per employee, so if the annual party was less than £150 per head, there is no tax charge on the employees. When working out the cost per head, any associated transport and overnight accommodation must be included.
If the cost for the function is more than £150 per head, then the whole cost per head is chargeable to tax on the employees, not just the excess over £150.
Where a business has multiple annual events during the tax year that qualify for the exemption, the cost per head must be calculated for each event. If the total cost for all events doesn’t exceed the £150 limit, there is no charge. If the cost does exceed £150, the exemption can be used against whichever functions best utilise it, and any remaining functions are considered a benefit in kind, potentially resulting in a tax bill for the employee. The £150 cannot be deducted from the total cost per head to tax only the balance.
Christmas Gifts
An employer may provide a gift to employees, and provided the cost of the gift is “trivial” - £50 or less (inclusive of VAT) per employee - there is no taxable benefit for the employee. Typically, this would be a bottle of wine, chocolates, flowers, or a gift voucher. Amazon vouchers, high street retailer vouchers, and flexible multi-retailer cards such as Love2shop are all included.
Directors are subject to an annual cap of £300 per tax year (inclusive of VAT), and each individual benefit cannot exceed £50.
If the cost of the gift exceeds £50, it is taxable on the employee and should be included on a P11D or included in payroll calculations if payrolling benefits apply.
This rule does not apply to cash gifts or vouchers which can be exchanged for cash. These are always taxable and should be included in the payroll calculations.
Exceeded the exemptions?
If the employee exceeds the exemptions in the tax year, the taxable amounts must be included on a P11D for each employee at the end of the tax year or included in the payrolling benefits calculations for the pay period. The employee will pay tax on the taxable benefit, and the employer will pay Class 1A National Insurance (15.8%).
Alternatively, the employer can apply for a PAYE Settlement Agreement (PSA). This is an arrangement between HMRC and the employer where the employer agrees to pay the tax on any gifts and events each tax year so that the employee is unaffected.
A PSA can be applied for anytime during the tax year and up to 5 July following the end of the tax year. For the 2026/27 tax year, the deadline for applying for a PSA is 5 July 2027.
If you would like more information or advice on these matters, please contact us.