Want to make a gift to your employees? You need to understand the rules on trivial benefits to avoid being caught out
It is approaching that season when employers are thinking about making gifts to their employees.
Providing employees with smaller gifts and perks (such as wine, store vouchers, chocolates and other food items) often comes under the umbrella of ‘trivial benefits’.
What is a trivial benefit?
Trivial benefits are essentially tax-free gifts for employees. The concept of a ‘small gift’ can be interpreted in different ways, which is why HMRC introduced specific guidance to ensure clarity on what constitutes a trivial benefit:
- It costs £50 (including VAT) or less to provide;
- It isn’t cash or a cash voucher;
- It isn’t a reward for their work or performance; and
- It isn’t in the terms of their contract or part of a salary sacrifice arrangement.
Trivial benefits do not need to be reported to HM Revenue & Customs (HMRC), and no tax or National Insurance (NIC) is due.
There is normally no limit to the number of trivial benefits, as long as they don’t exceed £50 (including VAT) each time. However, see below for the restrictions on directors of ‘close’ companies, including their family and households.
Tax on non-trivial benefits
Benefits that do not meet all of the criteria outlined above are often classed as ‘benefits in kind’ – these must be reported to HMRC so the correct amount of tax and NIC can be paid.
To pay tax on non-trivial benefits:
- P11D and P11D(b) forms need to be submitted to HMRC for every employee who received expenses or benefits;
- There is no need to submit a P11D for an employee if the tax due on their benefits is paid through the payroll – often referred to as ‘payrolling’; however
- A P11D(b) form will still need to be submitted for any Class 1A NIC that is owed.
It is important to note that if the cost of the benefit exceeds £50 (including VAT), the full amount is subject to both tax and NIC – not just the portion above the £50 limit.
PAYE Settlement Agreements
Of course, some employers will not want their employees to incur tax on a gift that exceeds the £50 limit or doesn’t meet some of the other above conditions and will prefer to pay the tax and NIC themselves.
An option could be a PAYE Settlement Agreement, where you agree with HMRC to pay the NIC and tax on the employee’s behalf.
Please note, however, the gift has to be grossed up for the tax and any NIC you are paying on the employee’s behalf. Therefore, the NIC and tax can work out higher than you would expect, so can become quite costly.
We can assist with preparing and submitting the PAYE Settlement Agreement on your behalf.
Directors of ‘close’ companies
Please note directors of a ‘close’ company (or a member of their family or household) cannot receive trivial benefits worth more than £300 (including VAT) in a tax year.
The rules are quite complex regarding what a ‘close’ company is, so do contact us if you wish for any advice on this. As a very rough guide, if you have a company which is controlled by the directors as shareholders, or is controlled by five or fewer shareholders, you will have a ‘close’ company.
This £300 yearly limit is separate to the exemption for annual events, such as Christmas parties or summer BBQs. For such events, claims can be made of up to £150 (including VAT) per employee, further details on this can be found here.
How M+A Partners can help
If an employer provides a ‘trivial benefit’ to its employees, the benefit is exempt from tax as employment income – a valuable exemption if it is correctly managed. M+A Partners’ team of experts work with clients to ensure available tax reliefs are employed in the most effective way. We can also assist with PAYE Settlement Agreements.
To find out more about trivial benefits or the tax planning services we provide, get in touch with your usual M+A Partners’ contact or contact myself using the below details.
