Taxation of Christmas Bonuses to Employees

Christmas Bonuses are a once off payment made to the employee during the Christmas period in addition to their average salary. Though not legally obliged to, employers often provide this bonus to encourage loyalty, increase productivity or to say thank you for all the hard work and give people a bit extra to spend at this expensive time of the year. However, as an employer you need to understand the tax payable on such bonus, which we have outlined below;

Cash Bonuses

If you provide your employee with a Christmas Bonus in the form on cash, this bonus is still treated and taxed as if was earned via overtime or as a bonus at any other time of the year. Therefore the total amount is chargeable to Income Tax (IT), Universal Social Charge (USC) and Pay Related Social Insurance (PRSI).  Bonus payments are calculated as such:

  • The pay is taxed at the standard rate of tax up to the rate band limit
  • The pay above the rate band limit is taxed at the higher rate of tax
  • The two amounts above together are added together
  • This amount is then reduced by the tax credits to give the amount of tax due.

Tax-Free Vouchers

For those who wish to provide a bonus to their employees in a more modest way can avail of the Small Benefits Exemption Scheme. This scheme means company directors and employees can receive a non-cash bonus of up to €500 on a tax-free basis annually. As the payment must be non-cash, the most common way to avail of this scheme by using gift vouchers.  However, there are conditions to be aware of when availing of this scheme:

  • The benefit cannot be cash.
  • The gift voucher must be purchased from the company funds, e.g. company bank account or company credit card.
  • The director or employee cannot purchase a voucher themselves and seek reimbursement from the company.
  • Only one such benefit can be given to an employee in each tax year.
  • Where a bonus exceeds the €500 limit, the full value is subject to tax.

No matter what form of bonus you choose to use, whether with cash or vouchers, consider what would be the best for your employees. Full knowledge of tax on this matters means you can be more considerate of the final bonus amount your employee receives.