Christmas may be a time of year when tax issues are the last thing on your mind.  Few of us give our tax affairs much thought as we exchange gifts with our friends and families.

However, there are several ways in which Christmas can affect the tax that you pay.  A recent report from the TaxPayers’ Alliance found that the average household will face a record Christmas tax bill of £283, as a result of VAT paid on presents and other goods, and tax on alcohol and petrol.

So, here are three of the most important ways that Christmas can have a big impact on your tax liability whether you are a business or an individual.

1.  Your Christmas bonus

If you are an employer, Christmas bonuses to your staff can be costly. They have tax and national insurance deducted before reaching the employees and, for you as an employer, in most cases national insurance will be added at 12.8%.

Instead, many employers provide their staff with something called a ‘trivial benefit’ such as a bottle of wine or a box of chocolates.  As long as the cost is reasonable, HM Revenue and Customs don’t treat these as a ‘taxable benefit’.  There is no limit as to what HMRC deems ‘trivial’ but under £50 per head is generally considered acceptable.

However, if you give gift vouchers to your staff, these are always a taxable benefit, whatever the amount.

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2. Reduce your Inheritance Tax liability

Last year, the website LoveMoney.com found that Inheritance Tax was the second most hated tax by Brits, beaten only by Council Tax.

So, if you have a large and valuable estate, the Christmas season could be the perfect time for you to consider your Inheritance Tax (IHT) planning.  Any gifts you make to individuals will be exempt from Inheritance Tax as long as you live for seven years after making the gift. These sorts of gifts are known as ‘potentially exempt transfers’.

So, you can give larger gifts to your friends and family at Christmas as, if you live for seven years, there will be no IHT to pay on these assets.  You can also give away gifts worth up to £3,000 in each tax year and these gifts will be exempt from Inheritance Tax when you die.

Similarly, you can give unlimited gifts up to the value of £250 to as many people as you like in one tax year.

At Christmas, you can also make unlimited gifts to registered charities without paying any Inheritance Tax.

3. The Christmas Party

For benefit in kind purposes, there is an exemption for employee entertaining.  However, the tax relief only applies to ‘annual parties’ available to all staff and is set at £150 per head.  This figure is inclusive of VAT, so with a VAT rise scheduled for 4 January 2011, the timing of the party may be relevant.

If the cost of the Christmas party goes over £150 per head then all the costs (not just those above £150 per head) are taxable as a benefit in kind. It is important to note that the cost of the party is the whole cost of the event, from the start to the end and as a result, taxis home and any overnight accommodation have to be included in the calculation.

When you take into account food, drink, transport, accommodation and Christmas decorations, the cost of a Christmas bash can easily exceed £150 per head and leave your business with a huge tax bill.  In the event that the limit is exceeded, the benefit must be reported on each employee’s P11D.

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