Christmas 2021: Employment tax principles you need to know

Tax on trivial benefits

There is an allowable £50 per individual benefit which can be used, and as long as all of the following apply, taxes on benefits for employees will not attract tax:

• Costs £50 or less to provide
• It is not cash or a cash voucher
• It is not a reward for work or performance
• It is not in the terms of their employment contract.

This is a ‘trivial benefit’ and neither tax nor National Insurance will apply, there is also no requirement to inform HMRC. You may have to pay tax on benefits that do not meet all these criteria.

Vouchers

The requirement to report to HMRC and pay tax depends on the nature of the vouchers and whether or not they are exchangeable for cash.

Vouchers that are exchangeable for cash are equivalent to earnings, so will attract PAYE and Class 1 National Insurance (through payroll).

Vouchers that are exchangeable for goods and services only (other than exempt trivial benefits noted above), must be reported on P11D and added to earnings when deducting Class 1 National Insurance (but not PAYE).

There are some exceptions, some non-cash vouchers, that do not attract Class 1 National Insurance including (but not limited to):

• Small gifts from third parties (conditions apply)
• Long service awards (conditions apply)
• To attend an annual party or function provided by an employer for employees (see below for conditions).

Annual parties and social functions

Directors and employees can be charged on their share of the expense incurred by an employer in providing a social function for employees, except where legislation exempts the charge to tax.

The exemption applies to an annual party (including Christmas parties) that is provided for employees and is available to employees generally, or to employees generally at one location (if more than one location exists). As well as this, the cost of the event per head must not exceed £150.

If there are two or more events, no tax charge will arise for which the cost per head aggregate does not exceed £150. If the cost per head goes over this figure, then only events which together can fall within the £150 will be exempt and the remainder are taxable.

Please note that the £150 is not an allowance.

Virtual functions

If an annual function is provided virtually, online, the exemption can still be achieved, provided the conditions regarding annual parties and social functions are also satisfied as the exemption applies to the cost of providing the event.

The above information is a basic summary of guidance from HMRC and each charity should review its unique situation to assess the tax benefits or implications.

For support with the employment tax principles detailed above, please contact us today for bespoke advice tailored to your charity.