'Tis The Season of Giving

Christmas should be a time for giving. Whether you’re an employer thinking about how to reward staff for their hard work, or a private individual hoping to give a generous gift to a family member, it’s worth remembering that the taxman is not quite as generous as Santa Claus when it comes to giving.

It’s important to consider what you can do without creating any unnecessary and potentially costly tax problems.

FOR EMPLOYERS:

The Christmas Party

The cost of the Christmas party (and indeed other annual functions) is generally an allowable tax deduction for the business. However, the deduction will not apply if you are a sole trader and you plan to treat only you and your spouse or partner to a night out!

If structured correctly, the Christmas party shouldn’t be a taxable benefit on the employee as long as the party is open to all employees and the cost per head isn’t more than £150, which includes any transport or accommodation provided.

The limit applies on a cumulative annual basis so consideration is required, if say, you’ve already thrown a summer party.

Gifts to employees

Gifts are usually an allowable tax deduction for the business.

Under £50: The employee themselves may be taxed under the benefit in kind rules. However, if the gift is trivial, which means it does not exceed £50 in value and is not cash or a voucher, the taxman will consider the benefit exempt. So this might cover a seasonal gift of a turkey, small hamper, or wine.

Over £50: If the gift does exceed £50, normally the exemption is lost and the whole amount becomes taxable on the employee. However, as with anything in tax, the detail is slightly more complex so further advice should be sought if this is the case.

Christmas bonuses

Unfortunately, for the employee Christmas bonuses in the form of cash and vouchers will always be taxable. However, for the employer the cost is treated in the same way as normal salary and is tax deductible for the business.

FOR INDIVIDUALS:

The main tax of concern is inheritance tax and ensuring full use of available tax free exemptions.

Small gifts

Up to £250 in any tax year can be made tax free and to as many people as you wish. The exemption is separate to the annual exemption which covers the first £3,000 of gifts made in any tax year.

Gifts out of income

Gifts can be made out of income, tax free. In order to qualify the gift must be part of your normal expenditure and, taking one year with another, be made out of surplus income so that your current standard of living is maintained.

Finally, if you have already bought your Christmas gifts and your employer is due to pay out your Christmas bonus shortly you could always pop the amount you receive into your pension pot. This may enable you to obtain some higher rate tax relief.

I’ll save the subject of pensions for a later date but if you need advice now on this or any of the other issues covered here, please do get in touch.