Many people exchange Christmas presents without ever worrying about tax. Gifts between friends and family are usually not subject to Income Tax, but large lifetime gifts can have Inheritance Tax implications for the giver. However, when gifts relate to work or business, the rules definitely change.
When Christmas Presents Become Taxable
You do not normally face tax when you receive gifts in your personal life. Tax rules usually apply when gifts connect to work or business. These situations include:
- Gifts that employers give to staff
- Gifts that employees receive from their employer
- Gifts received by self-employed people
- Gifts that businesses give to clients
- Gifts that employees receive from customers
Tax on Christmas Presents from Employers
Many employers like to treat their team at Christmas. HMRC allows employers to give small gifts tax-free, but only when the gift meets strict criteria.
What Counts as a Trivial Benefit
A gift qualifies as a Trivial Benefit when it meets all the following conditions:
- It costs £50 or less (including VAT and delivery)
- It is not cash or a cash-convertible voucher
- It does not reward performance or work
- It is not part of the employee’s contract
When a gift meets these rules, both the employer and the employee avoid tax and National Insurance.
When the Gift Exceeds £50
A gift becomes taxable when it costs more than £50. The £50 limit is not an allowance. This means tax applies to the full value of the gift, not just the amount above the limit.
For example: A £40 festive hamper stays tax-free. A £55 hamper becomes fully taxable.
In this scenario, the employee pays tax on the value of the gift and the employer pays Class 1A National Insurance.
Bonuses and Vouchers
Bonuses sit outside Trivial Benefit rules. HMRC always treats cash bonuses as earnings. Employers must process them through payroll and deduct PAYE and National Insurance.
Vouchers that employees can exchange for cash follow the same rule. Non-cash vouchers stay tax-free when they cost £50 or less, and meet all Trivial Benefit conditions. The full value of the voucher becomes taxable when it exceeds £50.
Annual Limits for Directors
Directors of close companies have a total annual cap of £300 on Trivial Benefits. They may receive several gifts during the year, but each gift must cost £50 or less, and meet the usual conditions. This cap does not apply to regular employees.
Tax on Christmas Presents for Employees
Employees enjoy tax-free presents at Christmas when they stay within the Trivial Benefit rules. When a gift exceeds the £50 rule, the employer will need to account for tax and National Insurance appropriately. The employee then pays tax on the full value.
Tax on Cash and Vouchers
Cash gifts always count as taxable earnings. Employers must include them on payslips and deduct PAYE and National Insurance. Vouchers that employees can exchange for cash also count as earnings.
Non-cash vouchers stay tax-free if they meet all the conditions, including the £50 rule. Once they exceed it, the full value becomes taxable.
Gifts from Customers
Customers sometimes give presents to employees as a thank you. Gifts from the same customer up to £250 in a tax year are generally not taxable. If the total from that giver exceeds £250, the whole amount becomes taxable.
Self-Employed People and Christmas Presents
Self-employed people often receive presents from clients in December. If a client gift is effectively payment or a reward connected to your work, you should treat it as business income and include it on your Self Assessment. If it is clearly a personal gift with no link to your services, it is less likely to be taxable.
Giving Presents to Clients
Businesses often send small gifts to clients at Christmas. Most of these gifts count as entertaining and do not qualify for tax relief. A gift becomes tax-deductible only when it meets all the following rules:
- It costs £50 or less per recipient per accounting period (companies) or tax year (sole traders)
- It contains clear promotional branding
- It does not include food, drink, tobacco or cash-exchangeable vouchers
Branded diaries, pens, mugs and calendars are common examples.
VAT and Corporation Tax on Client Christmas Presents
VAT and Corporation Tax rules add extra considerations.
You generally do not have to charge or account for output VAT on business gifts to the same person, provided the total cost does not exceed £50 (excluding VAT) in any 12-month period. If you go over this limit, you normally have to account for output VAT on the gifts.
Most client gifts do not qualify for Corporation Tax relief, including hampers and chocolates.
For example: A business spends £1,000 on hampers containing food and drink. The entire cost counts as entertaining, so the business cannot claim Corporation Tax relief. It must calculate its tax bill as though the £1,000 was never spent.
Annual Staff Events and Christmas Parties
Christmas presents remain a popular festive tradition. HMRC allows tax-free annual events when they meet very specific rules. An event stays tax-free when:
- It costs £150 or less per head and includes relevant costs
- It is open to all staff or all staff at one site
- It qualifies as an annual event
The total cost must include entertainment, food, drink, transport and accommodation. If you hold more than one annual event, the combined cost across qualifying events must stay within £150 per head for the exemption to apply.
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This article is for general informational purposes only and does not constitute legal or financial advice. While we aim to keep our content up to date and accurate, UK tax laws and regulations are subject to change. Please speak to an accountant or tax professional for advice tailored to your individual circumstances. Pi Accountancy accepts no responsibility for any issues arising from reliance on the information provided.