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The Boss of the company I work for has just sold his company. He has now retired, but he has decided to award monetry gifts to all employees. A formula has been developed to determine a fair distribution of the gift.

The gift is most likely to be given in our salaries. My question is:- Is this gift taxable. If it isn't what would be the best way to ensure that

1, it isn't taxed,

2, claiming the tax back from HMRC?

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    It seems to me that this is not so much a gift as a bonus - and bonuses are taxable just like salary (source). But I'll let someone with UK-specific experience confirm this. – Nate Eldredge Sep 20 '14 at 14:03
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I think it's most likely that HMRC would consider this taxable, but I don't think it's absolutely clear-cut. The relevant manuals on their site are linked from EIM00515.

The key question is whether the payments are "from the employment" or not. In general any kind of payment associated with employment would be considered taxable. One key quote from EIM00600 is:

"For my part I think that their meaning is adequately conveyed by saying that, while it is not sufficient to render a payment assessable that an employee would not have received it unless he had been an employee, it is assessable if it has been paid to him in return for acting as or being an employee."

In EIM00610 it says:

Payments made voluntarily can be taxable earnings. The cases listed below also demonstrate that the absence of a legal obligation on a person to make a payment does not prevent it being taxable as earnings within Section 62. A hairdresser's tip is an example of earnings that are paid voluntarily.

The one thing that makes me think it might just be possible to make a case the other way is this:

For example, a wedding gift from an employer to an employee would not normally be taxed as earnings under Section 62. Looking at it from the employee's point of view they do not receive it by virtue of being an employee but because of an event unconnected with their employment - their marriage.

You might, somewhat tenuously, argue that the employer's retirement is unconnected with your employment as such.

EIM01460 gives some other non-taxable examples of this nature which also bolster this point of view slightly:

  • A grant from a religious society in recognition of faithful service by a clergyman
  • Gift by shareholders to a person who wound up the company
  • Proceeds of a cricketer's benefit match
  • Gift of shares to the director of a company
  • A gift to mark appreciation of work done by an employee during a period of secondment
  • A bonus to members of England's football team which won the World Cup in 1966

However, even if this argument is valid, you say it's being paid in your salary. I think HMRC would take this as pretty strong evidence that your employer considers it to be earnings from your employment. So they would expect your employer to deduct tax, and it'd be really hard to persuade them to pay the tax back afterwards.

Perhaps the best thing would be to contact HMRC in advance, describe the circumstances, and ask if they think it's taxable. If they say they think it is, then decide whether you have the stomach for a fight.

If it isn't taxable, or you want to try to argue that it isn't, then try to persuade your employer to pay it to you directly instead of through salary; then write to HMRC to inform them of the payment and see what happens next.

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