Maintaining staff morale is an important part of managing a productive workforce and showing your appreciation by way of gifts and other benefits is undoubtedly good for staff morale and there are some tax-efficient gifts that will help keep the costs down.

Tax-Free Gifts

Annual Function Pitfalls

Generally, the usual annual function exemption will only apply if all employees (or all employees in one office or team location) are invited and the VAT-inclusive cost per head is less than £150.

PAYE Settlement Agreement (PSA)

Commonly, PSAs are used to settle tax on staff-wide benefits where the employer has treated the staff, such as entertainment or gifts for good service.  The advantage to employers is that they do not then need to include expenses and benefits included within the PSA on a form P11D. Similarly, employees don't pay tax on them or have to declare them on their tax returns.

The only benefits that can be included in a PSA are the following:

• minor
• irregular, and
• impracticable for the application of PAYE

The HMRC guidance on what can be included in a PSA is deliberately vague to promote flexibility and therefore only stipulate benefits that cannot be included in a PSA which are:

• cash payments of wages
• other cash payments such as long service awards
• large benefits provided regularly to individual employees such as company cars, car fuel, or beneficial loans
• round sum allowances
• shares
• items from which tax has already been deducted under PAYE
• items that are already reflected in the employee’s tax code for that year
• profits arising from various mileage payment schemes and other regular items arising in employee car

Notwithstanding these clear benefits, PSAs are an expensive alternative, as the employer must ‘gross up’ the PSA item for income tax and NIC. The effective combined income tax and NIC rates for the employer are as follows:

• 20% taxpayer – 42%
• 40% taxpayer – 90%
• 45% taxpayer – 107%

For example, the total cost of making a £100 gift under a PSA to a 40% taxpayer is around £190.

The PSA must be arranged before a PAYE and Class 1 NIC liability arises because that liability is fixed and cannot be changed by a PSA being agreed retrospectively. 

The calculation of the tax and NIC payable under the PSA should be provided to HMRC by the date in the PSA, which is often 31 July or 31 August following the end of the tax year. 

Please get in touch with the Pierce tax department for more information on how to set up a PSA.