There is actually a whole book on this subject, called the History of the Christmas Fairy Doll. The belief in fairies and other spirits is of course much older than Christianity, and like many Christmas traditions, and indeed the feast of Yuletide itself, the fairy goes back to an earlier time. The tradition of decorating the house with holly and mistletoe has a similarly ancient origin, and in fact according to some traditions the holly bush was supposed to be the place where fairies lived. The later tradition of using a fir tree came from Germany and Scandinavia, where it also had pagan origins to do with celebrating the midwinter festival.

When the first ‘modern’ Christmas trees began to be decorated (probably around the 15th to 16th century in Germany and some of the Baltic and Scandinavian countries, at first they were usually decorated with things you could eat, like gingerbread, and glass ornaments similar to the baubles we use today. Then they began to put a picture or small doll representing the baby Jesus at the top of the tree, and this was probably how the idea of the fairy or angel got started. It also became common to put a star on top to represent the Star of Bethlehem.

After 1841 Christmas trees with an angel on top became popular in Britain. This was mainly because Queen Victoria and Prince Albert had one, and a picture of it appeared in a lot of newspapers.

Even today, an angel or a fairy remains the most popular tree-topper. The angel is in fact more used than the fairy, though for many people it’s probably true to say that they don’t notice much difference. Basically, the idea of the fairy is more influenced by pagan origins as mentioned earlier, and nowadays probably by the popularity of images of fairies in Walt Disney films and popular culture generally. The idea of the Christmas tree angel, on the other hand, is probably based on the Christian story about the angel who came to tell the shepherds about the birth of Jesus and told them to follow the star and find him in Bethlehem; though it may also derive from the story of the Archangel Gabriel who is said to have visited Mary and told her that she would give birth to the son of God. In the early church angels were usually seen as male figures and very powerful; but in later mythology, and especially in the Victorian tradition of the 19th century, they were more usually seen as sweet, feminine figures watching over humans – very like the angel we see on Christmas trees today.

In a similar way, in pagan mythology fairies were mysterious, often rather frightening beings, who neither loved nor hated humans but often had power over them. Again with time, the idea of a fairy came to be associated with a gentle, feminine being who could grant wishes by waving a wand and who (like a guardian angel) existed mainly to help humans. Of course there were stories about ‘bad fairies’ too, but they don’t come into the Christmas stories.
And so, over time, two traditions with very different origins have come to be seen as almost the same thing. If you asked most people whether the doll on their Christmas tree was an angel or a fairy, probably a lot of them couldn’t tell you without checking (and even then, often the only way to be sure is by looking to see if there’s a wand, as the dolls often look very similar).