Christmas is coming to payroll teams
During Christmas and the associated holiday season, payroll managers experience some annual adjustments and events. Simon Parsons takes us through some of the festive benefits – and the associated tax implications.
In England, Wales and Northern Ireland, the shared Bank Holidays of Christmas Day, Boxing Day and New Year’s Day cause adjustment to payment timetables. Additionally Scotland sees additional Bank Holiday of St Andrews Day.
There is no statutory right to paid leave during these periods, however, employees may receive some of their paid holiday entitlement across the Christmas period or have alternate contractual right to paid holiday. Some may even have enhanced uplifts in pay if having to work through the holiday season.
During this Christmas period many employers bring forward pay day and pay early, some have seasonal close downs and may pay two weeks’ pay instead of one, others may pay Christmas bonus or provide a gift.
So, what is the position with regards to Tax and NICs on all of these items and does that have any impact on RTI filing?
Change Of Pay Date
If an employee’s regular pay day falls on a non-banking day in the holiday period, and therefore chooses to pay the employee on the last banking day before or the next banking day after the regular payday, HMRC instruct employers to treat the payment for PAYE purposes as if they had been made on the regular pay day. The payday reported on the RTI FPS submission is the regular pay day and not any adjusted pay date. The same principle applied to National Insurance Contributions.
For example, if the regular pay date would be 25 December and the payment is brought forward to 24 December instead, the FPS should show the regular date of 25 December.
Christmas shutdowns & payment of holiday in advance
If an employer pays their Christmas season holiday pay in advance, so instead of the usual one weeks pay, employees receive two weeks pay followed by a week with no payment, then PAYE is accounted in the following way:
- For employees with a cumulative tax code, calculate and record PAYE using the free pay for the last week in which no pay is received.
- For employees with a week 1/month 1 tax code, divide their holiday pay for each of the weeks and work out the PAYE separately.
In both of the above cases the tax period is advanced to reflect two weeks’ payment and the FPS reports that the number of periods covered is two for two weeks.
For weekly payrolls only (not two weekly-fortnightly, four weekly-lunar or monthly multiples) there are special NIC procedures to follow using either of two methods:
- Method A – Split the payment for each week and work out the NIC due on each individual week. This method is only permitted for weekly payrolls.
- Method B – Work out NIC on the whole sum based on the number of period being used. This method can be used for any pay frequency.
Cash bonuses additionally paid at Christmas count as earnings. The amount is added to the normal employee earnings and tax and Class 1 NICs is applied using the usual payroll procedures.
Where an employee is provided with goods as a seasonal gift, then a consideration needs to be made as to whether the item can be resold or exchanged for cash by the employee. For those earnings under £8,500 then there is no reporting, no tax or NICs to pay. For company directors or employees earning £8,500 or more then there is a P11D reporting obligation and Class 1A liability on the employer based on the value of the benefit provided.
However, HMRC may accept that the gift is a “trivial benefit”, in which case there is no liability or reporting requirement. The value used is the cost of the provision to the employer.
Trivial Benefits (Seasonal Gifts for Christmas)
There are no set rules or actual set monetary limit determining what types of benefit are trivial. However, some accountancy firms might suggest that a value of up to £50 could be considered acceptable to HMRC.
Some employers provide employees with Christmas gifts such as a turkey, an ordinary bottle of wine or a box of chocolates for Christmas. HMRC do state that “all of these gifts can be treated as trivial benefits”. Trivial benefits are not to be included in a PAYE Settlement Agreement (PSA).
If the gift extends, from example given by HMRC, from a bottle or two to a case of wine, or from a Turkey to a Christmas hamper, the content and costs may cause HMRC to consider that the gift is no longer trivial.
Cash benefits, benefits with a money’s worth and non-cash vouchers (such as shopping vouchers), no matter how small, are not regarded as trivial.
Where employers provide employees with immunisations against flu, HMRC treat such a benefit as trivial where it relates to routine seasonal flu jabs. The provision does not apply to any other sort of immunisation.
Christmas & New Year Parties
There is an exemption from tax and NICs and no requirement to report if an employer provides a party (or similar event) for employees that meet three conditions:
- It’s an annual event such as a Christmas or New Years party.
- The event is open to all employees to attend.
- The cost per head isn’t more than £150.
Where a business has more than one location, a single location event open to all staff based at that location will qualify. If a workforce is organised into separate departments, then separate parties held for separate departments may qualify as long as all employees will be entitled to attend one of the events.
The £150 threshold is not an offset against the cost of a more expensive event. Equally the entitlement applies to each attendee, including guests. If the £150 per head is exceeded then there is no exemption and the full cost would be considered a benefit on the employees who attended.
Third Party Gifts
Small gifts of goods made to employees (or a member of their family or household) are also exempt from tax when the following conditions are met:
- The gift is not provided or procured by the employer or anyone connected with the employer.
- The gift is not made in recognition, or anticipation, of the provision of service performed by the employee.
- The gift is not cash, vouchers or securities that can be converted to cash.
- The total cost does not exceed £250. If the value exceeded £250, then the full amount becomes taxable.