December is often a time when businesses look to give back to their employees and celebrate the company’s success over the last year. The most common way to do so is through a Christmas bonus, usually in the form of some extra cash, but this is not always the best way to get the most from your money.
Cash bonuses paid by businesses are subject to Income Tax, which means that anyone who receives a bonus will not benefit from the full value of your Christmas gift. If you give goods with a cash value, these will also be subject to a tax liability that will reduce their value in most cases. These factors can make it difficult to decide how much to offer as a bonus, and may lead you to ask whether you can give a Christmas bonus without incurring this tax liability.
Thankfully, there is a way. By using the trivial benefits exemption to offer staff (including company directors) bonuses in the form of gift vouchers, you can avoid any tax liability for the business and for the recipient and let your staff enjoy the full value of a well-earned Christmas bonus.
Here, the expert chartered accountants at Sherlock & Co will explain how the trivial benefits exemption works, the restrictions that apply, and what businesses need to do in order to take advantage of this exemption in time for Christmas.
How can I make sure gift vouchers qualify as tax-free bonuses?
Gift vouchers are among a number of possible items that may be considered “trivial benefits” under tax law. Unlike cash bonuses or goods, trivial benefits are not subject to Income Tax, although there are some conditions that you must meet when giving vouchers to ensure that they qualify as trivial benefits.
If the gift vouchers meet all of the following restrictions, it will be considered a trivial benefit:
- Each voucher must cost a maximum of £50
- The voucher must not be a cash voucher or be exchangeable for cash
- The recipient must not be entitled to the voucher through the terms of their contract
- The voucher cannot be given as a reward or performance incentive
- The voucher cannot be provided as part of a salary sacrifice arrangement
Not only are vouchers that meet these conditions free from any Income Tax liability, but their cost is a tax-deductible expense for the business. It does not matter where you buy the voucher from, so you are free to pick something your staff will like. You might choose a popular high-street shop, an online outlet, or a voucher that they can spend in multiple places to allow them to choose for themselves.
Are there limits to how many vouchers I can give?
There are no limits on how many vouchers you can give, but there are some limitations on how many staff members and directors can receive. For employees, there are very few restrictions and they can enjoy essentially unlimited trivial benefits each year (that meet the above conditions), but they cannot receive more than one per day.
For directors of companies with five or fewer shareholders, there is an annual limit of £300 per tax year on the trivial benefits they can receive. These businesses are referred to as “close” companies and this £300 limit extends to anyone who lives in the same household. Nevertheless, this means that directors can enjoy up to six £50 gift vouchers each year without incurring any additional tax liability.
For these reasons, vouchers that qualify for the trivial benefits exemption can be a good way to offer bonuses throughout the year. What is more, trivial benefits are discretionary, which means that you do not have to give them to every employee. You can give to one employee, a group, or your entire staff – just remember, you cannot give them in recognition of hard work without incurring a tax liability and this may be more difficult to prove if you give them to only a few select recipients.
With all of this in mind, we hope that you take advantage of the trivial benefits exemption and give a generous, tax-free Christmas bonus to your staff this year.
By Andrew McGain, Director, Sherlock & Co. Chartered Accountants