Is my Christmas bonus tax-free?

The festive season is well under way and for some lucky employees they can look forward to much more than just the office party, an extended festive break and the eagerly anticipated 'secret santa' gift!

Is my Christmas bonus tax-free?

This is the time of year when some companies will give staff a Christmas bonus to thank them for all their hard work over the past 12 months. Whilst the financial boost can be very welcome during this (expensive) month, we thought it would be the perfect opportunity to run through some of the rules surrounding Christmas bonuses as this could have an impact on your PAYE tax and payroll.

What yule should know!

  • HMRC views Christmas bonuses as earnings, so as with all other elements of your employees' wages, it will need to be reported to HMRC in order for certain deductions to be made.
  • As an employer you must add the value of the Christmas bonus to your employees' other earnings and then deduct and pay PAYE tax and Class 1 National Insurance through your payroll.
  • If you reward your staff at Christmas with goods (instead of cash) you must pay class 1A national insurance on the value of the bonus and report it on a P11D, which deals with expenses and benefits.

Claiming your Christmas party costs

You need to be aware of the rules and regulations surrounding entertaining your staff at Christmas. We've put together a simple video which gives the essential party tax tips and how much you can claim them back!

In essence, you can have a party for your employees costing up to £150 per head (per year) without it being treated as a taxable benefit. The event should be open to all staff generally, though it is possible to have separate parties for different departments.

The cost includes VAT together with any extras for food and drink, travel and accommodation. But beware, if the cost exceeds £150 (even by £1), you will lose all the tax benefit. A one-off event, such as a 25th anniversary party, does not qualify.

If you hold multiple events each year, and the combined costs exceed £150, you can choose one event to be exempt.

Tip: To calculate the cost per head, you should divide the cost of each event by the number of people who attended (including any guests).

HMRC offers the £150 sum as a concession but you must follow strict guidelines to ensure you benefit from it. These rules cover the invite list (are you including spouses & partners too?) and the regularity of the event (the Christmas party must be shown as an annual event that all staff are invited to).

Your merry little helpers!

As payroll, PAYE and cash flow experts we can help you plan and manage your festive finances. We can take care of form filling when it comes to rewarding Christmas bonuses and provide with any tax advice before you start your party planning.

So whether you splash out on a boat party on The Thames or have a sit down meal at a 5 star hotel, remember to claim back the costs!

Please get in touch to discuss your yuletide plans as we want to make you sure you have a cracker of a Christmas!

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Lawrence Grant

We are a member firm of the Institute of Chartered Accountants of England & Wales (ICAEW). Registered to carry on audit work in the UK and Ireland. Our Insurer is Prosure Solutions (per W R Berkley , and IGI), 34 Lime St, London EC3M 7AT (worldwide, excluding North America). Also an independent member of GGI, a multidisciplinary worldwide association of accountants, tax consultants & lawyers.