Planning to treat your staff this Christmas? Here’s what you need to know about tax

As the Christmas party season gets into full swing, companies across the country will be enjoying a well-deserved get together following a two-year hiatus.

For businesses hoping to treat their staff this Christmas, then there are tax rules they should be aware of.

Craig Harman, a tax specialist at Perrys Chartered Accountants, explains:

“For businesses arranging client and staff entertainment, training, and events, or planning to give their staff gifts, the rules on taxation can be somewhat unclear. Showing your appreciation to highly valued clients and hardworking staff is important, so organising an event, like a Christmas party, or rewarding them with a gift, is part and parcel of maintaining and building relationships and boosting team morale. However, while some expenses will be tax deductible, others aren’t.”

So, what are the rules for Christmas parties and employee presents, and what do business owners need to know if they’re planning to treat their staff? Craig continues:

“Whether you are a small business that is organising a quiet meal out for two or three people or arranging an extravagant party for multiple staff, these are generally tax-deductible expenses – meaning you can deduct these from your profits before tax.

“However, the cost of the dinner, function or party must be less than £150 per head. If the cost exceeds this, and this includes not just the venue hire and bar bill, but the cost of providing transport and overnight accommodation too, then it will be considered as a taxable benefit in kind and must be included on an employee’s P11d form.”

There are other rules that apply to staff entertainment as outlined below:

This £150 limit is an exemption and not an allowance, which means if the overall cost of the party amounts to £151 per head, the whole amount will be taxable as a benefit in kind (not simply the £1 excess)

The limit applies to the entire tax year, not to individual events. Therefore, employers need to ensure the combined cost of all events is less than £150 per head

The function or party must be open to all employees or all of those in a particular area – smaller team dinners will not be tax deductible

The exemption is only available for annual events, such as a Christmas party – ad hoc staff meals throughout the year are unlikely to qualify for exemption

If the function fails to meet the above conditions, and is therefore taxable, employers can enter into a PAYE Settlement Agreement (PSA) with HMRC to pay the tax on behalf of their employees. There is some good news though, says Craig:

“The £150 limit can also include a spouse or partner, so if a business wants to be even more generous, then the overall limit is effectively doubled.”

Christmas gifts to staff may also be exempt from tax and NI up to £50 under the trivial benefit exemption, so non-cash gifts or vouchers can be given to reward staff for their hard work all year.

Craig added:

“If you’re feeling generous, giving additional time off for Christmas shopping or to watch the school play also has no tax implications.”