The festive season is here and some employers will be looking to reward their staff for all their hard work this year with a Christmas bonus. However, for some companies, Christmas bonuses can bring added stress and pressure, especially if they are worried about being unable to afford it after a difficult couple of years or aren’t sure what the rules and responsibilities are.
If you’re an employer providing Christmas bonuses to your employees, it’s important for you to understand all of the tax, National Insurance and reporting obligations you are responsible for. In this guide, we’ll be explaining the rules and regulations around Christmas bonuses to ensure you’re compliant and jolly this Christmas.
Do Employers Have to Pay Employees a Christmas Bonus?
No one wants to feel like the Grinch at this time of year but for some businesses, paying staff a Christmas bonus may not be a cost they can afford. However, deciding not to pay a Christmas bonus has the potential to create problems, especially if it has been custom in the past.
The answer to whether an employer is legally required to pay a Christmas bonus isn’t always straightforward. To begin with, you need to determine whether or not the employee has a contractual right to the bonus or if the bonus is discretionary.
Contractual vs Discretionary Bonuses
The right to be paid a bonus will usually be contained in the employee’s contract of employment or in a bonus scheme that is expressed to be contractual. Additionally, the right to a bonus can be one that has developed over time through custom and practice.
If the employee’s contract contains a clause that entitles the employee to a Christmas bonus of a certain level then employees are bound to pay that amount and will be in breach of a legal contract if they don’t. However, these clauses tend to be rare and it is more common for a contract to say that a Christmas bonus is payable at the employer’s discretion.
Help, I Can’t Afford to Give Christmas Bonuses this Year but It Is Part of the Contract!
If you find yourself in the tricky situation of being unable to afford the additional cost of Christmas bonuses, there are a few things you can try. First, you can try to seek your employee’s consent to waive their entitlement to a bonus. If consent isn’t given, you might decide to pay the bonus on this occasion and then amend their contract later on, perhaps during a review, to prevent this issue from happening again in the future.
Alternatively, you may wish to seek greater legal advice on how you can make changes to an employee’s terms and conditions.
Custom and Practice
If there is no clause in the contract about Christmas bonuses but the business has paid Christmas bonuses every consecutive year, an employee may argue that there is an implied contractual right based on the established custom and practice of receiving a Christmas bonus each year before.
Whether the practice becomes an implied contractual right depends on the regularity of payments, how much the amount varies each year and how many years they have been paid for. For example, if an employer has paid a Christmas bonus of around £500 every year for 25 years, they will likely struggle to argue that this has not become a contractual right. However, an employer that has made more ad hoc payments of different amounts over the last 5 years are unlikely to be contractually bound to pay such a bonus.
If you are unsure about whether or not your employees are entitled to a Christmas bonus through an implied contractual right, your best bet is to just be open and upfront with them and explain why you are unable to pay a bonus this year. By doing this, you avoid surprising and disappointing staff as much and they are likely to be much more understanding and accepting of your decision.
What You Need to Report and Pay
If you do decide to give staff a Christmas bonus, you may have to report any Christmas bonuses to HM Revenue and Customs (HMRC) and deduct and pay tax and National Insurance on them.
Christmas Cash Bonus
Any cash you give to employees as a Christmas bonus is counted as earning, meaning you will need to add the value to your employees’ other earnings. You’ll also have to deduct and pay PAYE tax and Class 1 National Insurance through payroll.
Christmas Gifts
If you give goods as Christmas gifts and they can’t be counted as trivial benefits (non-cash gifts worth less than £50 that isn’t in the terms of the employee’s contract), you will need to report the, on form P11D and pay Class 1A National Insurance on the value of the benefit (how much the goods cost you).
For more advice and guidance on paying staff Christmas bonuses and other corporate financial matters, please don’t hesitate to reach out to our team of experts!