Written by Steve Martin
Senior Client Services Manager
Ward Goodman
November 13, 2024
Celebrating achievements and creating a sense of community through annual parties or events is a wonderful way for employers to bring their teams together. However, it is crucial for employers in the UK to understand the associated tax and National Insurance obligations when hosting these events or giving gifts to employees.
This blog post will guide you through the key reporting requirements for annual functions, gifts, and other related benefits.
Reporting Requirements for Annual Functions and Parties
If you are hosting an annual party, such as a Christmas event or summer gathering, there is a specific tax exemption that may apply. Under Section 264 of the Income Tax (Earnings and Pensions) Act (ITEPA) 2003, an annual function can be exempt from tax if it meets the following criteria:
- Available to All Employees: The event must be available to all employees. It must not be limited to certain individuals or departments unless all staff have a similar opportunity to attend.
- Cost Limit: The total cost must not exceed £150 per head, including Value Added Tax (VAT). This amount covers all aspects of the event, such as food, drinks, entertainment, and even transport and accommodation, if applicable.
The cost of the event must be divided by the number of people attending (including non-employees such as spouses or partners). If the cost per person stays within the £150 threshold, the event will qualify for the tax exemption, and there is no need to report it.
It is important to note that the £150 is an exemption, not an allowance. If the cost exceeds £150 per person, the entire amount becomes taxable to the employee rather than just the excess over £150.
Hosting Multiple Events
Employers often hold more than one event per year—such as a summer party and a holiday gathering. If the combined cost of these events does not exceed £150 per head across the year, they remain exempt from tax. However, if the combined cost exceeds the limit, only one event can qualify for the exemption, and the other event will be treated as a taxable benefit to the employee. In this situation, it is advisable to apply the exemption to the most expensive event to reduce the tax liability.
For example, if a summer party costs £75 per head and a Christmas party costs £100 per head, the combined cost exceeds £150. In this case, you can choose to apply the exemption to the Christmas party, making the summer party a taxable benefit.
Virtual events can also qualify for the exemption if they meet the criteria of being generally available to all staff members.
Gifts and Trivial Benefits
Beyond annual events, employers may also wish to provide gifts to employees, particularly during the holiday season or to mark special occasions. Gifts may qualify as “trivial benefits” under Section 323A of ITEPA 2003 if they meet the following conditions:
- Value: The gift must not be valued at more than £50.
- Nature of the Gift: It must not be cash or a cash voucher.
- Purpose: The gift cannot be a reward for performance or work done.
- Contractual Obligations: The gift should not be part of any contractual arrangement.
If a gift meets these conditions, it qualifies as a trivial benefit, and there is no need to report it for tax or National Insurance purposes. Employees can receive multiple trivial benefits throughout the year, without any limit, as long as each individual benefit is valued at £50 or less. However, directors of close companies are limited to receiving six trivial benefits, worth a total of £300 per tax year.
Reporting Non-Qualifying Events or Gifts
If an event or gift does not meet the exemption or trivial benefit criteria, it is treated as a taxable benefit. Employers must report this on a P11D form, detailing the full cost for tax and Class 1A National Insurance purposes. Alternatively, employers can opt to process the benefit through payroll if they are registered to do so.
Many employers choose to use a PAYE Settlement Agreement (PSA) to handle these benefits. A PSA allows employers to settle the tax and National Insurance due on minor, irregular, or impractical benefits or expenses, which can include items like gifts or events that exceed the exemption limits.
Further Reading
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Final Thoughts
Annual functions and gifts can be a fantastic way to build morale and reward your staff for their hard work, but it is vital to ensure you are complying with UK tax and National Insurance requirements. By understanding the criteria for exemptions and trivial benefits, you can effectively manage these perks and avoid any unexpected liabilities.
If you need guidance on managing employee benefits, feel free to reach out to our expert team at Ward Goodman for personalised advice.
About Ward Goodman
Ward Goodman is an established provider of accountancy and financial services based in Dorset. Our team of financial planners is dedicated to helping you achieve your financial goals by providing expert advice and services tailored to your needs. Whether you need assistance with managing your business or planning your family’s financial future, we are here to help.
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