How to give tax-free gifts to your employees

15 November 2018

Tax free gifts for your employees

The majority of employees would love to receive a tax-free gift from their employer. However, employers should be aware of whether or not they need to pay tax on the gift.

Trivial benefit rules came in to force from 6 April 2016

They confirm that a Benefit in Kind (BiK) received by an employee from their employer will not be subject to tax without the need to agree this with HM Revenue & Customs (HMRC) if:

  • The benefit is not cash or a cash voucher
  • The benefit is not a contractual right (including salary sacrifice arrangements)
  • The benefit is not provided in recognition of particular services performed by the employee as part of their role
  • The cost of providing the benefit doesn’t exceed £50 (including VAT)

There is no limit on the number of trivial benefits that an employer can provide, as long as it doesn’t exceed £50 each time.

However, if the company is a close company, an officer of the close company (or a member of their family or household) the cost of providing the trivial benefit is increased to £300 in a tax year.

If the BiK is not subject to Income Tax, there will also be no Class 1A National Insurance Contribution (NIC), as NIC only arises if there is an Income Tax charge. If the conditions of the trivial benefits exemption are not met when the BiK is provided to the employee, the full value of the BiK will be subject to the normal BiK rules. For example, an employer awards a £60 John Lewis voucher to their employee on the occasion of their marriage. The entire award would be subject to Income Tax and NIC as the total cost exceeds the £50 limit. It is important for employers to understand that it is not just the excess over the £50.  

Tax-free staff parties

In addition to trivial benefit rules, there are totally separate rules for social functions. An employer can claim an exemption from a BiK under the social functions and parties exemption section 264 ITEPA, where the costs are £150 or less which are open to all employees (including guests).

Employers may, therefore, want to consider combining the two where they hold a number of social functions and they exceed the £150 per employee.For example, an employer holds two functions per year for its employees - a Christmas party and a summer party. The Christmas party costs £45 per head and the summer party costs £150 per head. 

Historically this would have exceeded the £150 limit for the social functions and parties exemption. If the limit is exceeded the whole benefit is subject to tax (and potentially NIC). Under the new rules, the first event could be covered by the trivial benefits exemption as the amount does not exceed the £50 limit, the second event could be covered by the social functions and parties exemption.

Employees can save tax of £10 for basic rate taxpayers and £20 for higher rate taxpayers each time they make a trivial benefit gift to their employees. Officers of a close company can save up to £135 in tax.

Want to know more?

For more information on trivial benefits, please contact Ann Bibby on 01295 250401 or email abibby@ellacotts.co.uk.