How not to give the taxman a Christmas bonus
If you are holding a staff Christmas party this year, be careful to avoid a hefty tax bill.
There's every reason to be able to enjoy your Christmas party to the full if you plan your spend carefully. Providing the cost does not exceed £150 per head, there is no tax or NIC to pay. This rule applies to any annual event. But the relief is given in a slightly unusual way which often catches employers out.
One or more event
If the cost of a single event exceeds £150 per head, the whole amount is taxable and liable to NIC. If you offer several events in a tax year, the costs of all events are combined to maximise the available exemption. And any costs not covered by the exemption are fully taxable. For example, you have three events in the year costing £90, £65 and £55 per head. The best solution is to combine the £90 and £55 events, as together they are within the exemption. The £65 event is then fully taxable and liable to NIC.
The totals to use in this calculation are inclusive of VAT and all associated travelling and accommodation costs should be part of this. The cost per head is calculated on the number of people attending the event, including spouses or partners if applicable, rather than the number invited. But beware - if that amount exceeds £150, the tax payable for each employee will be their own plus that of any accompanying spouse or partner.
Who pays the tax?
The benefit of attending the Christmas party is actually taxable on the employees, but most businesses don't want their staff to have to pick up that tax bill. So the employer must enter into a PAYE Settlement Agreement with HMRC so that the employer pays the tax. However, the tax payable has to be grossed up to allow for the fact that paying the tax itself is taxable! The calculation also depends on whether the employee is a basic or higher rate taxpayer, and NIC is charged on the grossed up figure.
So if you want to avoid putting a smile on the taxman's face this Christmas, do your sums before you book.
For more information, contact Ian Gadie in our business tax team on 020 7516 2256 or igadie@littlejohnllp.com
