December is when a lot of Wigan businesses say thank you to their team, with a Christmas do, a hamper or a voucher in the card. Handled the right way, most of that can be free of tax and National Insurance for both you and your staff. Handled the wrong way, a generous gesture can turn into a payroll headache in the new year. Here is what small employers across Wigan and the North West need to know before booking the party or ordering the gifts.

The Christmas party: the £150 per head rule

HMRC lets employers put on an annual staff event without it counting as a taxable benefit, as long as a few conditions are met:

• The total cost works out at £150 or less per head for the tax year, including VAT. That figure covers everything: food, drink, venue, entertainment, transport home and any overnight stay.
• The event is annual, such as a Christmas party or a summer barbecue, not a one-off celebration.
• It is open to all your employees, or to everyone at one site if you have more than one location.

To work out the cost per head, divide the full cost by everyone who attends, including partners and guests. So a £1,200 party with 10 staff and their partners (20 people) comes to £60 per head, comfortably inside the limit.

It is a limit, not an allowance

This is where people get caught out. If the cost per head goes over £150, even by £1, the whole amount becomes a taxable benefit, not just the bit above £150. If you hold more than one annual event, you can use the £150 across them, but only on events whose combined cost fits under the limit.

Staff gifts: the £50 trivial benefits rule

A bottle of wine, a hamper or a high street gift card can be tax-free under the trivial benefits rules. Each gift must:

• cost £50 or less per employee, including VAT;
• not be cash or a cash voucher (a store gift card is fine; a cash bonus is not);
• not be a reward for work or performance; and
• not be part of the employment contract or a salary sacrifice arrangement.

Like the party rule, £50 is a cliff edge. A £60 hamper is fully taxable, not just the extra £10. There is no limit on how many trivial benefits an ordinary employee can receive in a year, provided each one genuinely meets the rules.

A special cap for directors

If you are a director of a small limited company (a “close company”), or a member of a director’s family who works in the business, trivial benefits are capped at £300 per tax year. That catches a lot of owner-managed companies in Wigan, so keep a simple note of what you have had.

Christmas bonuses go through payroll

Cash is always treated as pay. A Christmas bonus, however small, needs to go through your payroll with PAYE tax and National Insurance deducted in the usual way. The same goes for cash vouchers. If you are not sure how to add a one-off payment, our payroll in Wigan team can handle it as part of your normal pay run, and our PAYE page explains how we support employers year round.

What if you go over the limits?

Going over £150 or £50 is not the end of the world, but it does need dealing with. You have two main options:

• Report it as a benefit, so your employees pay tax on it through their tax code or P11D, and you pay employer Class 1A National Insurance.
• Use a PAYE Settlement Agreement (PSA), where you pay the tax on your employees’ behalf so the gift stays a genuine gift. We explain how these work, and the 22 October payment deadline, in our guide to PAYE Settlement Agreements.

Most staff would rather not see a tax bill for their Christmas present, which is why many employers choose the PSA route for anything over the limits.

Corporation Tax and VAT on staff entertaining

The good news for limited companies is that the cost of a staff party or staff gifts is normally an allowable expense, so it reduces your Corporation Tax bill. If you are VAT registered, you can usually reclaim the VAT on staff entertaining too.

The picture changes when non-employees join in. Entertaining clients, suppliers or other guests counts as business entertainment: the cost is not deductible for Corporation Tax and, as a rule, the VAT cannot be reclaimed. If a party mixes staff and clients, the cost needs splitting between the two. Our VAT team can help you get that split right on your return.

If you are a sole trader with no employees, a party just for yourself is not a business expense, however hard the year has been.

A quick Christmas checklist for Wigan employers

• Set a party budget and check the cost per head, including partners, stays under £150 for the year.
• Make sure the event is open to all staff, or all staff at that site.
• Keep gifts at £50 or less each, and avoid cash or cash vouchers.
• Keep track of directors’ trivial benefits against the £300 annual cap.
• Put any cash bonus through payroll with tax and National Insurance.
• Keep receipts and a short note of who attended and who received what.
• Talk to your accountant about a PSA if anything goes over the limits.

If you are also taking on extra help for the festive rush, read our guide to payroll for seasonal workers.

Talk to an accountant in Wigan

CMA Accountancy helps small businesses across Wigan and the North West with payroll, bookkeeping, VAT and Corporation Tax, so a thank-you to your team stays a thank-you. If you would like a quick check on your Christmas plans, visit our accountant Wigan page or get in touch. Email [email protected] or call 01257 255521. We are based in Appley Bridge, Wigan.