Contrary to the current weather in Scotland, the summer season is in full swing – even more exciting for employers – there’s a tax relief that provides an exemption which stops certain summer occasions, events, and small gifts from becoming a taxable benefit for their employees.
Annual event exemption
Hosting an annual staff event, like a summer BBQ, will be an exempt benefit under the ‘Annual Event’ exemption, providing it meets the following conditions:
- The total cost of the event does not exceed £150 per employee
- It is an event that occurs annually or is intended to be held annually
- It is open to all employees, or all employees based at a particular location.
The total cost of the event includes all food, drink, taxi fares, incidental accommodation, related gifts and, most importantly, VAT. The VAT inclusive value must be considered whether the employer is VAT-registered or not. If spouses, partners, or guests of employees attend, their per head cost is ignored and not aggregated in with employee costs for the purposes of the exemption.
But don’t get caught out – the £150 per head limit is an annual value. While it’s possible for the exemption to cover two events, the combined total cannot not exceed £150 per head (e.g., a Summer BBQ at £60 per head, and a Winter Party at £80 per head).
If an employer hosts two events where total costs exceed £150 per head, they need to choose a ‘best fit’ option to utilise the £150 per head limit. For example, if a Summer BBQ is £60 per head and a Winter Party is £110 per head (total annual cost per head being £170), the employer can choose to either apply the exemption against the Summer BBQ (£60 per head relief), or the Winter Party (£110 per head relief) — but not both. In this case, the most beneficial route is to claim the annual exemption against the Winter Party (with relief at £110 per head), and leave the Summer BBQ as taxable.
Trivial benefit exemption
In addition to annual events, employers can also provide employees with small gifts, free of tax and National Insurance (NI), providing these conditions are met:
- The value does not exceed £50 (including VAT)
- It’s not in the form of cash or a cash voucher (i.e., a cheque or payable order)
- It’s not a reward for work or performance
- It’s not expected under the terms of an employment contract.
To meet the ‘reward for work or performance’ condition, any gifts should be ad-hoc and not be a form of recognition for a job well done. Seasonal examples could include a food hamper, small social gatherings, or a quiz night. During the rest of the year, other examples could include birthday gifts (vouchers or flowers), or baby welcome gifts.
The exemption will not apply where ‘trivial benefits’ are provided regularly. The term regular is not defined by HMRC, but a trip to the pub once every few months could be considered ‘trivial’, but a trip once a week may not. There is also a £300 annual limit for directors of companies that are controlled by five or fewer participators (i.e. close companies).
Both these exemptions are all-or-nothing. So, if an event costs more than £150 per head, or a gift is over £50, then the whole cost is subject to tax and NI, not just the excess.
Benefit reporting
Where a benefit fails to meet the conditions for the Annual Event or the Trivial Benefit exemption, then the whole value is considered a taxable benefit for the employee. It’s common practice for employers to meet the income tax and NI obligations for gifts and parties by including such benefits on a PAYE Settlement Agreement (PSA).
PSA reporting allows you to make one annual payment to cover all the tax and NI due on minor, irregular, or impracticable expenses or benefits for your employees. Applications to put a PSA in place should be sent to HMRC by 6 July following the end of the year the gifts are provided. So, the application deadline for a 2024/25 PSA will be 6 July 2025. PSA payments are due by 19 October 2025 (22nd if paying electronically).
If a PSA is not completed, the amounts need to be included on an employee’s P11D form, where the employee is responsible for paying the income tax on the benefit.
Finally, remember that staff entertaining is an allowable expense for business/corporation tax purposes. This means the cost of a larger party can be deducted from taxable profits — a nice seasonal gift direct from HMRC that might help make up for the lack of the sunshine this summer!
If you need any further information or advice on employment benefits for your business, please contact Chantelle Martinez: chantelle.martinez@ct.me.
