With Christmas surprisingly just around the corner, and Christmas parties looking to be out of the question this year, many employers are asking how they can reward their staff for their effort throughout the year.
Maintaining staff morale is an important part of managing a productive workforce and showing your appreciation by way of gifts and other benefits is undoubtedly good for staff morale and there are some tax efficient gifts which will help keep the costs down.
You can make a gift to your employees that will not count towards taxable income or be subject to National Insurance Contributions (NICs) if it meets ALL of the following criteria:
Many High Street store gift vouchers will qualify for the exemption where they are not exchangeable for cash, for example the Love2Shop Vouchers.
If the gift does not meet all of the above criteria, it must be reported as a Benefit in Kind to HM Revenue & Customs (HMRC) and will be subject to tax and NIC.
Where the gift exceeds £50, the full amount (not just the excess) will be subject to both Income Tax and NIC.
There is no limit on the number of trivial benefits that you can provide in a year, as long as the benefits do not exceed £50 each time. However, where you are a ‘close’ company and the benefit is provided to an individual who is a director, the exemption is capped at a total cost of £300 for the tax year.
Generally, the usual annual function exemption will only apply if all employees (or all employees in one office or team location) are invited and the VAT inclusive cost per head is less than £150.
Unfortunately, whilst there have been calls for HMRC to relax the rules in light of COVID, so far they have not, so employers may have to think about how else they can celebrate Christmas with their employees, especially with so many still working from home.
There may be an option for employers to host a virtual Christmas party.
Commonly, PSAs are used to settle tax on staff-wide benefits where the employer has treated the staff, such as entertaining or gifts for good service. The advantage to employers is that they do not then need to include expenses and benefits included within the PSA on a form P11D. Similarly, employees don't pay tax on them or have to declare them on their tax returns.
The only benefits that can be included in a PSA are those which are:
The HMRC guidance on what can be included in a PSA is deliberately vague to promote flexibility and therefore only stipulate benefits that cannot be included in a PSA which are:
Notwithstanding these clear benefits, PSAs are an expensive alternative, as the employer is required to ‘gross up’ the PSA item for income tax and NIC. The effective combined income tax and NIC rates for the employer are as follows:
For example, the total cost of making a £100 gift under a PSA to a 40% taxpayer is around £190.
The PSA must be arranged before a PAYE and Class 1 NIC liability arises because that liability is fixed and cannot be changed by a PSA being agreed retrospectively.
The calculation of the tax and NIC payable under the PSA should be provided to HMRC by the date in the PSA, which is often 31 July or 31 August following the end of the tax year.
Please contact our tax department for more information on how to setup a PSA.