Are you planning on giving your employees a Christmas gift?
If you are, here is some information that you may find useful.
A Christmas bonus
Any cash bonus is always taxable on the employees and should be recorded through your business’ payroll. As an employer you may wish to gross up the amount you give your employee so that they can receive the amount of bonus initially intended net of tax. Alternatively you should make sure that the employee understands that the bonus is subject to both Income Tax and National Insurance Contributions (NICs).
Seasonal non cash gifts
An employer can provide employees with a seasonal gift, such as a turkey, an ordinary bottle of wine or a box of chocolates at Christmas without having to declare it as a benefit in kind, as all of these gifts can be treated as ‘trivial’ benefits.
For an employer with a large number of employees, the total cost of providing a gift to each employee may be considerable. But where the gift to each employee is a trivial benefit, this principle applies regardless of the total cost to the employer and the number of employees concerned.
If the gift extends beyond one of the items mentioned above, for example from a bottle or two to a case of wine, or from a turkey to a Christmas hamper, the gift may be deemed by HM Revenue & Customs as not being trivial anymore. You will need to consider the contents and cost of each gift before being able to determine whether the gift is trivial. While there is no definition of “trivial”, a non-cash gift under £50 should be reasonable.
If the gift is concluded to be trivial there is no requirement for a PSA agreement (see later) to be arranged or to include the gift on an individual’s form P11D.
Summary of tax treatment in a business for non-cash gifts
Trivial gifts & entertainment
The expense is a tax deductible business expense so it will qualify for tax relief at the prevailing rate.
Should you conclude that a gift is not trivial it should be recorded on the individual’s form P11D and it will be taxed through the individual’s PAYE code. The business will also have to pay Class 1A NICs at 13.8% on the value of the gift.
Both the gift itself and the Class 1A NICs paid by the business will qualify for tax relief at the prevailing rate.
Alternatively, the business can put in place a PAYE Settlement Agreement (PSA) which is where the business pays the tax and NICs on behalf of the employee. See later for further information on PSAs.
Non-cash vouchers e.g. store gift vouchers
Vouchers can never be “trivial” and therefore, if you provide your employees with a gift in the form of a gift voucher, whether the amount is £5 or £500 you have two options:
- Process the cost of the vouchers through the payroll and P11Ds
- Set up a PSA with HM Revenue & Customs.
Process via Payroll
The value of the vouchers will need to be added to the employee’s other earnings for NIC purposes only, meaning the employee will be subject to Class 1 Employee’s NICs on the additional amount received.
The value of the voucher gifted will also need to be declared on the employee’s form P11D and will be subject to income tax via the individual’s PAYE code. The business would also pay 13.8% Class 1A NICs.
PAYE Settlement Arrangement (PSA)
Where vouchers are provided it is possible to apply for a PSA, whereby the business will cover the Income Tax and National Insurance liabilities that arise on the vouchers on behalf of their employees. This has the advantage that employees will receive the face value of the voucher, as it is not eroded by tax or NI. Many employers will choose to put a PSA in place because of this.
Whether the gift is dealt with under a PSA or through the payroll, any amounts that the business pays will be tax deductible to the extent that they are for staff. It should be noted that a PSA is the more expensive route for the business due to the value of the gift having to be grossed up before the tax and NICs are deducted.
Organising a PSA
If providing vouchers to employees is something that you wish to consider for the current year then please let us know as soon as possible, as the PSA will need to be agreed with HM Revenue and Customs prior to the vouchers being provided to staff.
We will need to know the following information for each individual:
- The intended value of the voucher for each employee
- Gross salary plus value of any other benefits received
A PSA isn’t just for Christmas
A PSA is a convenient route for dealing with all kinds of staff entertaining or gifts throughout the year, not just seasonally. For example, if the value of staff entertaining exceeds £150 per tax year per person, then broadly speaking the excess must be taxed on the affected staff member via a P11D. To ensure the goodwill generated from staff entertainment is not eroded by a surprise tax charge on an employee, it may be dealt with via the PSA so that you, as employer, pay the tax on their behalf.
Expected change from April 2016
From 6 April 2016, based on recent consultations, it is expected that it will not be necessary to report trivial benefits in kind relating to staff gifts on P11Ds. The current proposal is that up to six small gifts per annum to an employee up to a maximum value of £50 for each gift will be tax free. This amendment is not definite and more will be known after the March 2016 budget.