2020/21 Tax Rates and Allowances
This page contains all of the personal income tax changes which were published on the gov.uk site on Fri 28 Feb 2020. These rates come into effect at the start of the new tax year, on April 6th 2020.
If your business is in the position to be able to afford to reward your staff this Christmas, there are other tax free alternatives to the traditional Christmas party.
Tax free gifts for Employees
No employee is going to thank an employer for a gift that results in Benefit in Kind (BIK) charges, and increased self-assessment requirements. Luckily, there are ways to gift up to £50 (including VAT) each year to your employees, without them incurring BIK. In order to comply with HMRC requirements on Trivial Benefits, the employee gift must:
- cost £50 or less, including VAT
- not be cash or a cash voucher (vouchers for a retail store that cannot be converted to cash are fine to give as an employee gift)
- not be a reward for their work or performance
- not be in the terms of their contract
If the above requirements are met, there is no need to report the gifts to HMRC and no tax or NIC's are liable on them. Trivial benefits, such as these, don’t need to be reported on your annual P11D or P11D(b) forms. VAT is also reclaimable by the employer on the cost of an employee's gift.
But beware, if the cost of the gift or gifts go above £50 in one year, including VAT, then the entire cost of the gifts becomes taxable.
Gifts for Directors of Close Companies
For close companies, which includes the typical family-owned company, there is a limit of £300 per tax year for gifts to a director and their family members who are employees. These gifts are subject to the same £50 requirements as stated above for employees, meaning each gift can be no more than £50 for each individual. In the case of a director or a family member of a director who is an employee, they can receive gifts up to the value of £50, and which total in one year, no more than £300, including VAT.
A close company is a limited company with five or fewer shareholders, who are all directors.
HMRC examples of what is and is not allowed
Example A – Benefits allowed as trivial
An employer gifts each of their employees a bottle of wine costing £25 as a Christmas present. However, as some of their staff don’t drink they give them a £25 supermarket gift voucher, which can be used to buy themselves an alternative. Both the bottle of wine and the non-cash gift voucher can be covered by the exemption.
Example B – Benefits not allowed
An employer gives each member of their 25-strong workforce a bottle of wine as a Christmas present. The total bill comes to £1,000. This is for 20 bottles of wine at £15 per bottle given to each of their employees, and five bottles of wine for the directors that cost £140 per bottle.
The £15 bottles of wine don’t exceed the trivial benefit financial limit, but the £140 bottles of wine for directors do.
See HMRC for more on Trivial Benefits.
Limited Companies and the Annual Party Exemption during COVID
*Note Sole Traders cannot claim the Annual party exemption, as they are not an employee. Their Christmas spending will be treated as their drawings.
With COVID restrictions in place, the traditional office Christmas party may not be happening this year, but for small companies/businesses and depending on which tier you are in, the COVID restrictions may not interfere with plans. In this case, they will need to comply with the HMRC regulations around Annual Staff Parties, which are:
- The party must be annual, meaning it does not have to be at Christmas
- The event must be available to all employees
- The cost per head must not exceed £150 including VAT
The £150 cost per head must cover the cost of:
- the party or function
- any transport or accommodation provided for those attending (including non-employees)
- any related VAT on the costs of the above
As long as the total cost, divided by the number of people attending, comes in at £150 per head, or below, then the cost does not incur BIK charges for those attending.
If the cost goes even 1p above £150, then the entire cost will be subject to BIK by the employees. The £150 is an exemption, not an allowance, and if it is exceeded, then the whole cost is taxable and must be reported on a P11D for the attending employees. The employee’s benefit must also include the cost of any attending spouse/partner who is not an employee in their own right. The employer must pay Class 1A following the end of the tax year. Alternatively, the employer can bear the tax themselves by including the benefit in a PAYE Settlement Agreement.
This £150 per head exemption, is an annual one, meaning it can be used up across more than one social event. For example, a business may decide to organise a staff summer bbq and a Christmas dinner/party. Neither will incur BIK implications for employees, so long as the total annual cost does not exceed £150 per head, including VAT.
*COVID - Any Christmas parties must comply with HMRC's rule that all employees must be invited, to avail of tax relief, while also abiding by the local COVID restriction tiers in place in your area. So for businesses other than small ones, an online Christmas party or accessing the Trivial Benefits Exemptions may be a better option this Christmas.
What about a Virtual or Online Christmas Party?
Now that we are all Zoom/Skype/Teams experts, why not consider having a virtual party this year? As long as the above criteria have all been met, there should be no reason why the costs don't qualify for the exemption. Here are some tips to keeping your online work celebration within the guidelines.
- Provide proof that all employees were invited
- Retain proof of how many attended- using quiz apps like Kahoot, or events which need pre-registering by employees could help here? Remember you need to be able to divide the total cost (including VAT) by the amount of employees who attended and reach a figure of £150, or lower, per head.
- Consider providing the employees attending the online party with a hamper of food and drinks- (remember the total costs may include more than just the hamper). Note, the employees receiving the hamper must be attending the online party for it to qualify as part of the Annual Party Exemption. If hampers go to employees not attending online, they could be valued at a lower cost, under £50, to qualify for the Trivial Benefits exemption (meeting all the requirements listed in the Trivial Benefits section above).
Whatever way you decide to celebrate Christmas 2020 with your colleagues, enjoy!
Personal Tax
2019/2020 Tax Rates and Allowances
This page contains all of the personal income tax changes which were announced at the October 29th, 2018 Budget. These rates come into effect at the start of the new tax year, on April 6th 2019.
2018/2019 Tax Rates and Allowances
We have published a quick reference to the significant changes to the tax rates and bands, personal tax allowances and national insurance figures which come into effect from April 6th 2018.