Gifts to staff and directors
Staff rewards given as a bonus should always be paid through payroll as they are subject to both Income Tax and National Insurance.
As an alternative, why not consider giving a gift instead? Where a gift costs less than £50 these can be tax free as long as the gift is not cash or a voucher which can be exchanged for cash nor must it reward staff for their work or performance or be in the terms of their contract. For example, giving a £50 cash bonus to a 40% taxpayer would give an additional £29 take home pay and would cost you, as the employer, £56.90 to provide if your employer’s National Insurance is not fully covered by the Employment Allowance. An alternative would be to give that member of staff a £50 shopping voucher which would save the employee tax and National Insurance and also the employer’s National Insurance.
Directors of companies with fewer than 5 shareholders can also take advantage of these tax free trivial benefits, but these are restricted to 6 such benefits per tax year for such directors but still means £300 of tax free benefits can be enjoyed each tax year.
Where a gift costs more than £50, the whole amount is taxable.
VAT is usually recoverable on gifts made to employees.
The general rule is that there is no tax relief given on the cost of making business gifts although there are some exceptions. If the gift advertises your businesses, such as a free sample, or incorporates a conspicuous advertisement and costs less than £50, it may qualify for tax relief. No tax relief is available if the gift is food, drink, tobacco or an exchangeable voucher.
Where a business makes business gifts which are more than £50 or makes a series of gifts to one person exceeding £50 it should account for output VAT on the value of the gifts. If the cost is less than this, it is not subject to VAT. Output VAT does not need to be accounted for where a gift is a free sample of the business's product.