Are you planning on treating your staff or clients this Christmas? Christmas gifts can be subject to tax, so it is important to understand these tax rules this festive season.

Do gifts count as taxable income?

Christmas presents paid in cash to staff qualify as taxable earnings, which means they will be subject to income tax and national insurance contributions (NICs). The same rules apply to vouchers exchangeable for cash.

Taxable gifts must be reported on the employee’s P11D form.

Tax-free gifts

Seasonal gifts, such as Christmas presents, may be given tax-free, providing they meet the exemption criteria:

  • The cost of providing the benefit does not exceed £50 (or the average cost per employee if a benefit is provided to a group of employees and it is impracticable to work out the exact cost per person). If the cost of a gift, including VAT, exceeds £50, then the full value of the gift is taxable under the usual benefits rules
  • The benefit is not cash or a cash voucher
  • The employee is not entitled to the benefit as part of any contractual obligation (including under salary sacrifice arrangements)
  • The benefit is not provided in recognition of particular services performed by the employee as part of their employment duties (or in anticipation of such services).

Is there a tax-free gift limit?

Apart from the £50 per employee limit, there is no annual cap on trivial gifts that can be made to an individual employee during the year.

The only exception is where the company is considered “close” – such as a family business that is owned and controlled by five or fewer participators.

Where the employer is a “close” company and the benefit is provided to an individual who is a director or other office holder of the company (or a member of their family or household), the exemption is capped at a total cost of £300 in the tax year.

Gifts for clients

With the festive season upon us, many businesses want to purchase gifts for their clients. You must be aware of tax implications where this is the case.

Most of these are non-tax deductible, however, there are exceptions to this.

For example, if you are purchasing a branded item, this will be tax deductible. But if the gift can be exchanged or is over £50 in value, then it is not.

Even if the gift features a logo, non-promotional gifts and those that exceed this amount are classed as entertaining and are not tax-deductible.

For help and advice on related matters, please get in touch with our team today.