While Christmas might feel like a way off (28 days, but who’s counting?), now is a great time to start planning how to reward your employees for their hard work this year. A Christmas bonus is one way to say thank you. If you’re thinking of going down this route, keep reading for a comprehensive overview of everything from the legalities to taxes and alternatives.
What is a Christmas bonus?
Quite simply, it’s a bonus you pay your staff at Christmas time. Many companies offer a Christmas bonus as a gesture of goodwill as the year draws to a close. It can come in many forms, from a cash bonus to an extra day of holiday or a gift, such as a department store voucher. You could give employees £100, for example, or a percentage of their salary.
If you’re offering a Christmas bonus, be sure to make it inclusive to everyone – not just those who celebrate Christmas. You might want to refer to it as an ‘end of year’ bonus to make it more widely relevant, particularly if you’re a global company.
Should you have a Christmas bonus scheme?
You’re not usually legally required to provide a Christmas bonus, but many do. In fact, nearly half of businesses chose to offer a Christmas bonus to employees last year. It’s a non-discretionary bonus and therefore a ‘nice to have’ rather than an obligation.
There are, however, two exceptions to this rule. You must pay your staff a Christmas bonus:
- When it’s written into a person’s employment contract
- When a Christmas bonus is implied through custom or practice (for instance, if your company has been giving bonuses for 100 years and it’s now expected).
If you decide to offer a Christmas bonus, you might want to write it into your compensation philosophy policy so it’s accessible to and understood by everyone.
Why offer a Christmas bonus?
Just like any other employee benefit – like free catered lunches or subsidised gym subscriptions – Christmas bonuses can be a great way to improve employee morale. Winter can be a gloomy time of year, no thanks to the cold weather and short days here in the UK, so offering a bonus can be uplifting for many employees. Timing it for Christmas can give staff a renewed sense of motivation for the new year, too.
Christmas bonuses can also do wonders for company culture and retention. Everyone likes to feel rewarded for their hard work, so by giving everyone fair recognition, people are more likely to stay loyal to their workplace. Given that hiring a new employee can cost as much as three times that employee’s salary, it’s in your best interest to keep your staff sweet.
Of course, given the cost of living crisis we’ve been seeing over the last few years, it’s no surprise that Christmas bonuses are in more demand – and workers are more appreciative – than ever before. While many companies choose to splash out on a big end-of-year party to encourage team bonding and celebration, this research found that of those who weren’t interested in a Christmas party, 42% would prefer a bonus or gift.
Are they taxable?
In the UK, if you give your employees Christmas bonuses, you have certain tax, National Insurance and reporting obligations, which depend on:
- Whether you give cash bonuses or gifts
- If you give gifts, whether or not they can be resold for cash
Cash bonus
Any cash Christmas bonus counts as earnings, so you’ll need to:
- Add the value to your employee’s other earnings
- Deduct and pay Pay As You Earn (PAYE) tax and Class 1 National Insurance through payroll
Gifts
If you give Christmas gifts, and they can’t be counted as trivial benefits, you must:
- Report on form P11D
- Pay Class 1A National Insurance on the value of the benefit
Alternatives to Christmas bonuses
Giving your employees a Christmas bonus isn’t the only way to show your gratitude at the end of the year. Plus, for some businesses, it’s simply not viable with the budget they’ve got to play with (remember in 2021, when Tesco gave out boxes of Quality Street to employees instead of a bonus?)
Some companies choose to take their team out for lunch instead, or organise festive drinks in the lead up to the holidays. Other businesses close the office between Christmas and New Year to give staff the chance to properly relax and switch off. The gift of time never goes unnoticed, so even allowing an early finish on Christmas Eve could be a nice gesture – especially if you’re based in the US or any country where holiday allowance is limited.
However you choose to reward your employees this Christmas, make sure to do it in a way that’s fair so everyone feels recognised for their efforts. As the saying goes, “it’s the thought that counts”, so it’s worth taking some time to decide what your employees would appreciate. Whether you’re gifting some much needed time off or giving people a percentage of their salary, these tokens of appreciation will likely go a long way in making your staff feel valued.
