Staff Christmas gifts and parties: A tax guide

Staff gifts tax deductible rules tend to come down to whether you’re spending within HMRC’s exemption limits. Stay inside them, and a Christmas gift or staff party costs the business nothing extra in tax. Go over, even slightly, and what was meant as a nice gesture can turn into an unplanned tax bill for the business, the employee, or both.

Our guide sets out where those limits sit, for employee Christmas gifts, for parties, and for the VAT rules employers most often miss, so you are aware before you start spending.

Are Christmas gifts for staff tax deductible in the UK?

Employee gifts tax deductible status for the business itself is simple. The cost of employee gifts at Christmas is deductible against your trading profits, in line with HMRC’s own guidance on staff gifts (BIM45074).

What’s less simple is whether the gift creates a taxable benefit for the employee receiving it, which is a separate question, and the one most employers need help with.

Thankfully, HMRC have decided against being a total ‘Scrooge’ in this respect, and it is possible you can rely on the ‘trivial benefits’ exemption.

What is a trivial benefit?

For a benefit to be trivial it must meet the following criteria:

• The cost of providing the benefit does not exceed £50
• The benefit is not cash or a cash voucher
• The benefit is not provided under salary sacrifice arrangements or any other contractual obligation
• The benefit is not provided as a reward for services

For more details on how trivial benefits work across the year, see our guide: Understanding HMRC trivial benefits: what employers need to know.

How regularly can we use a trivial benefit?

The trivial benefits exemption can apply to any other gifts provided to employees throughout the year where the conditions are met. This could apply to employee Christmas gifts, Easter eggs, wedding, and new baby presents, etc. They cannot apply to any thank you gifts, as these would be classed as a reward for service.

Care also needs to be taken, as HMRC can challenge anything provided regularly under the trivial benefit exemption, as it might create a ‘legitimate expectation’. An example could be pay-day drinks. HMRC can argue that this expectation means that the trivial benefit exemption will not apply. See our guide on trivial benefits (linked above) for how this applies in practice.

What if the staff gift exceeds this value?

Where you wish to provide any gifts above £50 in value, this can still be done without a taxable benefit arising for the employee. However, these would need to be included in a PAYE Settlement Agreement (PSA), where you, as the employer, would pay the tax due on the benefit, on a grossed-up basis, on the employee’s behalf.

There are additional rules for directors and other office holders of close companies, who will be subject to an annual cap of £300.

Where the benefit is provided to a member of the director’s family or household who is not an employee of the employer, this benefit will count towards the £300 exempt amount.

Where the director’s or other office holder’s family or household member is also an employee of the company, they will also be subject to a £300 cap.

A PSA isn’t your only option. You can instead report the gift on the employee’s P11D and let them settle the tax through their own tax code or self-assessment.

A third option for some benefits is to payroll them directly rather than report via P11D or a PSA. See our payrolling benefits in kind FAQs for how this works.

But usually, most employers prefer a PSA for one-off Christmas gifts, as it keeps the tax and administrative burden with the business rather than the employee. However, where you’re only dealing with a handful of gifts, or want to avoid setting up an annual PSA, P11D reporting may be the simpler route.

Read our guide to PAYE Settlement Agreements for more on how PSAs work and when they make sense.

Are gifts to clients and customers tax deductible?

The rules above apply to gifts to employees. Gifts to staff are treated very differently from gifts to clients and customers, and the two can often get mixed up.

Gifts to clients and customers are generally treated as business entertaining, which isn’t tax deductible, no matter the value or reason. This covers items like alcohol, food hampers, and event tickets.

But there’s one exception: gifts that clearly advertise your business, such as branded merchandise carrying your company’s name or logo, are treated as advertising rather than entertaining, and are tax deductible, under HMRC’s VAT rules for business promotions. To qualify, the item must:

• cost no more than £50 per recipient in a 12-month period
• not be food, drink, tobacco, or a voucher exchangeable for any of these
• carry a conspicuous advertisement for your business

If a gift fails any of these conditions, it falls back into the non-deductible entertaining category.

Are work Christmas parties taxable?

As with staff Christmas gifts, the provision of a staff Christmas party would generally be considered as staff entertainment, and therefore a taxable benefit.

However, HMRC have an annual events exemption, which if the annual event falls under certain conditions, is exempt from tax arising from the benefit provided. The conditions are:

• It is an annual event
• It is open to all employees
• It costs less than £150 per head

Are ‘exempt’ parties only for Christmas?

This exemption can be spread over different events, such as a summer BBQ and a Christmas party. However, the cost per head of both events combined must not be over £150. Where this is the case, only one event will be eligible for the exemption (see HMRC’s example), and the other will need to be reported through a PSA (the cheaper event obviously!).

How is the cost of a Christmas party calculated for tax purposes?

The cost per head is reached by considering every cost that goes into the event such as the venue, food and drinks. It will also include any overnight accommodation and transport costs provided, and the amount must include VAT. The total cost is then divided by the total number of attendees, including any non-employees.

If the business has more than one location, an annual event that’s open to all staff based at one location is still ‘open to all’. You can also put on separate parties for different departments if all of the employees can attend at least one of them.

VAT on staff gifts and parties

The rules covered so far are about income tax and National Insurance. VAT is a separate consideration, and one that’s easy to overlook when planning Christmas gifts to staff or a staff party.

VAT on staff gifts

You can generally recover the input VAT on staff gifts, provided the total cost of gifts to any one employee doesn’t exceed £50 (excluding VAT) in a rolling 12-month period, under HMRC’s rules on business gifts.

This VAT limit runs along with the income tax trivial benefits threshold, but the two are assessed separately, and meeting one doesn’t automatically mean you’ve met the other.

Where the VAT limit is breached, you may need to account for output VAT on the gifts given, so remember to track cumulative gift costs per employee across the year, not just at Christmas.

VAT on staff parties

Input VAT on staff entertaining costs is recoverable in full, regardless of the cost per head. This is a useful distinction from the income tax position: even if your event breaches the £150 per head exemption and becomes taxable for income tax and NIC purposes, the VAT you’ve paid on the event remains recoverable.

If you’d like to review how your business is handling PAYE and benefit-in-kind risk beyond Christmas gifts and parties, our PAYE health check service can help you spot any gaps.

How can we help with tax on Christmas gifts for your employees?

There’s no doubt it’s tricky to get staff gifts tax deductible and staff party costs right. You must make sure your gifts, parties and entire benefits package stand up to scrutiny if HMRC ever asks questions. And if you have a well-planned approach, it means it will stay that way.

We can help you with the following:

• Reviewing existing employees’ remuneration packages for tax and NIC efficiency
• Planning flexible and tax efficient remuneration packages for key employees within your organisation
• Non-cash benefits to assist employees with their cost of living
• Setting up and submitting a PSA for non-exempt benefits

For an overview you can keep handy, download our employee benefits guide (PDF).

If you’re planning this year’s Christmas gifts or party and want to check you’re inside the exemptions or want a general review of how your business handles staff benefits, get in touch with our employer solutions team. We’ll help you plan it properly before you spend anything.