Do You Pay Tax On Your Christmas Bonus?

This article does not constitute financial advice and is designed for information purposes only.

If the autumn budget didn’t leave you feeling helpless at the hands of the tax man, then your Christmas bonus might. At the end of a long year, companies may choose to reward their employees with a Christmas bonus.

And whilst it’s definitely a welcome addition to any pay check, it’s also important to know the tax rules around them.

So, do you pay tax on a Christmas bonus? Unfortunately the answer is yes (in most cases) but it’s important to understand the ins and outs to avoid any nasty surprises.

Here, we tell you the basics of what you need to know – although it’s always worth speaking to a professional to confirm the rules around your specific case.

Why Are Christmas Bonuses Taxed?

Christmas bonuses are taxed because HMRC doesn’t see them as a gift, they see them as part of your earnings. Because of this, just like your salary, most bonuses are subject to PAYE Income Tax, Class 1 National Insurance and in some cases, student loans and pensions too.

The main thing to know here is that bonuses either in cash or paid through payroll are always taxable. And you can’t get around this by giving your employee a voucher that can be converted into cash. Cash-convertible vouchers are treated as cash for tax purposes and are taxed in exactly the same way.

So Why Do Christmas Bonuses Feel So Heavily Taxed?

If your bonus amount is added to your income and pushes you into a higher tax bracket, you may pay more tax on that portion of your earnings. This is a big reason why bonuses feel like they are heavily taxed – a lot of the time, they might just be taxed more than the rest of your salary due to income tax bands.

So how does this work? Well, say your salary is £50,000 per year. Under current income tax bands, you’d pay 0% tax on the first £12,570 and 20% on the rest.

Now add in a £500 Christmas bonus. Under income tax rules, any income between £50,271 to £125,140 is taxed at 40%. That means that £271 of the bonus would be taxed at 20% and £229 would be taxed at £40%. Because of this, tax on a bonus can feel disproportionately higher.

What About Non-Cash Christmas Bonuses?

Not all bonuses come in the form of cash. Some companies might choose to buy hampers, bottles or other gifts instead. In this case, these are usually treated as benefits in kind.

Whilst some gifts may be tax exempt (more on those shortly), benefits in kind be reported on a P11D form, and may be liable for taxation.

The only reason they may be exempt is if they qualify as ‘trivial benefits’.

What Is A Trivial Benefit?

One of the most common ways companies gift tax-free Christmas bonus is by using the ‘trivial benefits exemption’.

A gift counts as a trivial benefit if:

• It costs £50 or less
• It isn’t cash or a cash voucher
• It isn’t a reward for work or performance
• It isn’t in the terms of the employee’s contract

Most importantly though, it has to be given as a gift, not as a result of an employee’s performance. Even more important is that the item or voucher can’t be exchanged for cash, which is why vouchers and hampers are popular options.

Limits For Employees and Directors

When it comes to trivial benefits, there are a few other important things to know.

Employees can be gifted an unlimited number of trivial benefits during the tax year, as long as each one meets the £50 rule. So, multiple vouchers can be bought and given out, but the limit is £50 per person per day.

Directors are treated differently. They are capped at £300 per tax year, and this limit extends to any trivial benefits given to their family members or anyone living in the same household as them.

Are Christmas Parties Considered Taxable Gifts?

So you might be thinking – well I don’t want my employees to be taxed, but is taking them out considered a taxable gift? The good news is no, as long as:

• It is open to all employees at the company, not a select few
• It is an annual event
• It costs no more than £150 per person per year, including VAT

If the cost is above £150 per person then the entire amount becomes taxable, not just the excess. In this case, it may fall under a ‘benefit in kind’ which means employees and employers have to pay tax on it.

Christmas Tax

It’s the most wonderful time of the year – or so they say – however getting a big bonus could land you a tax bill you don’t want.

The truth is in most cases, Christmas bonuses are taxable. Cash bonuses are treated as an addition to your earnings, but smaller vouchers worth £50 can be exempt, as long as they aren’t convertible to cash.

Either way, knowing the rules can help you prepare and prevent any nasty ‘Christmas presents’ from HMRC.