Tax efficient gifting this Christmas

hands holding Christmas gift

Tis the season

To plan carefully for gifts and bonuses

Running a business is hard work. Whether you’re running a limited company, LLP, are a sole trader or a partnership you will be familiar with the non stop demand to keep your clients happy. To deliver goods or services in such a way that you create a loyal customer base who will be happy to refer and recommend you. 

So it’s quite normal that, as Christmas approaches, you start to think about ways to reward your greatest asset – your staff – and yourself for all the hard work over the last 12 months.

It’s also the time of year when the Chorus Accounting team are asked “How can I give gifts in a tax efficient way this Christmas?”

Myths abound when it comes to gifts and bonuses. So, with that in mind, below you will find the most common questions we are asked and the facts you need to know. 

Can I give gifts or bonuses at Christmas?

The answer is yes. Of course you can. But here’s what you need to consider.

Gifts for key clients or customers

Food and drink are common choices for gifts to key clients or customers. And whilst these can be given, you should keep in mind that no VAT can be recovered against these gifts and no tax deductions apply for either income tax or corporation tax purposes. 

Let’s put that into context. 

If you are a company director and spend £1,000 on food or beverage gifts for key client organisations, the business will still have to pay 19% corporation tax as this expenditure does not affect your profit. 

In contrast, presuming you take dividends from the business, taking £1,000 in cash will cost you a minimum of 7.5% personal income tax (or more if you pay income tax at a higher rate) which equates to a personal tax liability of £75 in respect of this gifting. Hence – allowing the business to pick up this cost saves you £75.

For sole traders or partnerships there is no additional cost if the business doesn’t pay. However – you do need to consider how you are going to track this for accounting purposes.

Gifts and bonuses for staff

Myths abound when it comes to gifts or bonuses for staff. So let’s take a look at the truth.

Can you pay a Christmas bonus?

The simple answer is yes. However, the bonus will attract both PAYE and National Insurance deductions. In addition, if your employee is auto enrolled on your company pension the bonus will also attract a pension deduction at the standard applicable rate. 

Can you pay £50 tax free?

Yes. However, you can only make one such payment per tax year and it cannot be linked to performance or a specific project. 

Can you give them food or drink as a gift?

Yes. But you guessed it – it’s not that simple. A food or drink gift worth £50 or less will be treated as a trivial gift. 

In addition, the £50 includes costs such as postage, the gift cannot be cash or a voucher with a cash value and must not be a term of the employment contract. 

If the gift is worth more than £50 then it will be treated as a benefit in kind thus attracting a tax liability for your staff member and 13.8% Class 1A National Insurance for the business to pay. 

As a company director, what can you take?

Company directors may take £300 of vouchers that can be used in a shop. However, the rules are clear in that you must buy vouchers NOT take the cash!

What about Christmas parties – surely you can offer one for staff?

As with the previous points the easy answer is yes. But there are rules. 

  • Staff parties cannot be classed as entertaining and are limited to £150 (inc VAT) per person. 
  • The £150 limit applies from end to end and includes travel, accommodation, food, drink and entertainment. 
  • The £150 limit is an annual limit which means you can’t host a Christmas party and a Summer Ball for example. 
  • If the cost per head exceeds £150 then it may be treated as a benefit in kind (BIK) unless your employees contribute. 
  • The £150 limit is an exemption not an allowance. This means that even 1p over the limit makes the full cost taxable.  
  • The event must be open to all staff, or all staff at each location if you have multiple business locations. 
  • The cost per head is based on the number of people attending – including guests.
  • Virtual Christmas parties are also eligible.

So how can you thank your staff this Christmas?

It’s been another tough year for many with the pandemic continuing to be felt so it’s understandable that you might be keen to express your gratitude to your staff during the season of goodwill. 

Here are some tax efficient ideas you could consider:

  • Give everyone a half day off for Christmas shopping
  • Give parents or grandparents time off to attend school events 
  • Book a festive team building event by volunteering for a local charity

Finally – however you choose to thank staff and gift to key clients, don’t forget to let your payroll administrator or accountant know so that they can process the transactions accurately. 

More about gifts, employee benefits and benefits in kind

For help and advice about gifting, employee benefits or benefits in kind for your business, get in touch today. Let’s talk.