Paying your staff Christmas bonuses over the festive season is a great way to reward their efforts and spread festive cheer.
If you’re an employer and you provide Christmas bonuses to your employees, it's critical that you have a good understanding of all your tax, National Insurance, and reporting obligations.
If your Christmas bonus policy is unfair, you risk upsetting your staff and being accused of using your discretion in bad faith. You can also raise concerns if you decide that your company can't afford to pay a bonus that year.
In this guide, we'll explain what a Christmas bonus is, the different types of Christmas bonuses, the rules around it and how to give out the bonus.
What is a Christmas bonus?
A Christmas bonus is typically a certain amount of payment, gift, goods, or other forms of bonus that companies provide to an employee during the Christmas holiday season.
This bonus is a reward that is paid in addition to their regular salary and is intended to thank them for their work and effort over the past year.
There is no fundamental requirement or statutory obligation for employers to provide holiday bonuses to their employees. However, if it’s included in the employee’s contract, there will be a contractual obligation for the employer.
The different types of Christmas bonuses
Bonuses are considered variable income for employees and can be discretionary or non-discretionary.
A discretionary bonus is awarded entirely at the employer's discretion. This indicates that an employee cannot expect their employer to give a bonus.
A non-discretionary bonus is the opposite of a discretionary bonus. The employer explains in advance what an employee must do to meet the bonus requirements, and if the employee meets the set of criteria, they receive the bonus.
Below, we will discuss a few types of Christmas bonuses you could give to your employees in order to help you make the best decision for your company.
Flat figure
This is perhaps the easiest bonus to implement, as you pay a single rate to all of your employees. You are showing your appreciation to all your employees fairly, regardless of their annual income or performance.
This type of holiday bonus is clear, precise, and predictable for employees. You should gradually increase it from year to year, based on overall company performance.
A percentage of annual salary
Percentage-based bonuses entail taking each employee's yearly income and returning a set percentage of it to the employee in the form of a bonus.
For example, you may pay them 2-3% of their annual income as a flat amount, which allows them to easily calculate how much they can expect.
Percentage-based bonuses are a type of fairly distributed bonus that conveys to all employees that the company recognises and respects them equally.
Profit share
A profit share-based bonus is a simple and straightforward approach for larger, national or multinational businesses to fairly distribute holiday bonuses. Under this scheme, employers can save and fairly distribute a portion of their business profit from that year amongst all of their employees.
Employers who own businesses that achieve consistent annual growth should consider implementing this scheme. In this case, they should provide their employees with regular updates on how the business is doing throughout the year.
Other forms of recognition
Christmas bonuses aren't always monetary, and employers may decide to offer alternative options based on the company's financial circumstances.
Small businesses who are battling financial difficulties can give their employees a simple handwritten Christmas card instead of a cash gift. They can also treat their team to a Christmas lunch or a party, which is a great way of thanking them for their efforts.
Another approach is a performance-based Christmas bonus that converts the performance metrics from the full year into a specific bonus amount.
This bonus system is popular in roles that require robust performance tracking, like sales or complaints. Employees can earn it after achieving certain targets, such as making a number of sales or contributing to a certain level of customer satisfaction.
The benefits of having a bonus scheme
Well-managed bonus schemes can have a positive impact on employee behaviour, increase productivity by improving motivation, and help you meet your business goals.
Poorly designed bonus schemes, on the other hand, might lose effectiveness over time and lead to employees viewing bonus payments as a normal income rather than an incentive.
The following are some of the many benefits of having a bonus scheme for both your employees and your business:
Increased morale
The most important benefit of giving holiday bonuses is that it's a good way of making employees feel valued and happy. A holiday bonus, whether a large payment or a couple of extra days off, reminds employees that you care about them and value their contributions to the company.
Bonuses help ensure that employees are rewarded for their hard work, which reduces the likelihood of burnout. Employees that are happier are more likely to stay with your company in the long run, reducing costly turnover.
Higher engagement
Employees that are happy are more engaged, and extra salary or other rewards are great means of keeping them happy. Engaged employees also create better work and can better satisfy your customers and clients' needs.
If you tie bonuses to yearly performance or business goals, employees will be highly motivated to meet those targets throughout the year. This can also benefit your company's production and performance even after the holidays have passed.
Increased productivity
Bonus schemes are also a great way for businesses to encourage their employees to improve their performance. It shows employees that you appreciate their hard work, dedication, and effort.
As employees improve business performance, the company's profits climb significantly, and your clients and customers will stand to gain as the product or service quality improves.
Rules and regulations around Christmas bonuses
If you're an employer providing Christmas bonuses to your employees, you may have to report them to HM Revenue and Customs (HMRC) and deduct and pay tax and National Insurance on them. This depends on the type of bonus you offer your employees:
Cash bonuses
Any cash you offer your employees as a Christmas bonus counts as earning, therefore you must add the value to their other earnings.
You must also deduct and pay PAYE tax and Class 1 National Insurance on payroll.
Christmas gifts
If you offer goods as Christmas gifts that aren't counted as trivial benefits, you must disclose this on form P11D and pay Class 1A National Insurance on the cost of the item.
Trivial benefits are non-cash gifts under £50 that aren't specified in the employment contract.
You can organise a party for your employees that costs up to £150 per year without it being considered a taxable benefit. The party should be open to all employees in general, although it's possible to hold separate events for each department.
The cost includes VAT as well as any costs for food and drink, travel, and accommodation. It's worthy of note that if the cost goes beyond £150, you will lose all tax benefits.
How to give out holiday bonuses
Implementing a company policy outlining the specific requirements that employees must meet in order to be eligible for a Christmas bonus is a great approach. Note this in the company handbook so that employees are aware of the bonus structure from the outset.
Remind them of the company policies at the beginning of each year to ensure that they understand where they stand. This will definitely reduce the number of queries you receive in the run-up to Christmas.
If you can't afford the bonus
If you choose to offer Christmas bonuses but find yourself in the difficult situation of being unable to pay the extra cost, you need to consider some solutions.
You can try to gain your employee's consent to waive their contractual right to a bonus. If the employee doesn't consent, you may decide to pay the bonus now and then amend their contract later.
Alternatively, you should consider seeking additional legal advice on how to amend the terms and conditions of your employee's contract.
Small businesses are often vulnerable, especially in their early stages, so it's safer for them not to offer bonuses as a contractual right.
Get advice on Christmas bonus from Peninsula
Offering a bonus is a great way that companies can reward their staff around the Christmas holiday season. It's best to outline your bonus policy in the employee handbook so that everyone is aware of their legal rights from the start.
When it comes to paying a Christmas bonus, it's important that you understand all of your tax, National Insurance, and reporting obligations as an employer.
Peninsula offers 24/7 HR advice which is available 365 days a year. We take care of everything when you work with our HR experts.
Want to find out more? Contact us on 0800 051 3687 and book a free consultation with one of our HR consultants.
