You can give your team a Christmas party without creating a tax bill for them. The key is to meet HMRC’s annual event rules, including the £150 per head limit.
Your budget needs to cover more than the meal. Guests, travel and other staff events can all affect the tax treatment. Here’s what to check before you book.
Start with the £150 limit
Your staff party can qualify for exemption from employee income tax and employer National Insurance when it meets these conditions.
- It’s an annual event, such as your regular Christmas party.
- You make it available to all employees, subject to the rules for separate sites and departments.
- The cost is £150 or less per head, taking account of other qualifying annual events.
Treat £150 as a strict limit. A single annual party costing £151 per head makes the full £151 taxable under these rules. You can’t deduct £150 first.
A one-off anniversary celebration doesn’t qualify as an annual event simply because you hold it near Christmas.
The annual event exemption doesn’t cover parties provided through a salary sacrifice arrangement.
Count the whole bill
Add up everything you pay to provide the event, including VAT. This covers food, drink, venue hire, entertainment and any transport or overnight accommodation you provide so people can attend.
Divide the total by the number of people who actually attend, including non-employee guests.
A £2,400 party with 20 attendees costs £120 per head. With only 15 attendees, the same bill works out at £160 per head and falls outside the exemption.
Leave room for extra drinks, service charges and changes in attendance. A £150 package gives you no margin for travel or other costs.
Check your venue’s cancellation terms before confirming numbers. You could still pay for people who don’t attend, which pushes up the cost per head.
Check your other annual events
You can hold several qualifying events, but their combined cost must stay within £150 per head for all of them to remain exempt.
For Christmas 2026, check events between 6 April 2026 and 5 April 2027. Your company’s accounting year may follow different dates.
Suppose your summer barbecue cost £60 per head and your Christmas party costs £110. You can exempt the Christmas party, but the summer event then creates a £60 taxable benefit for each employee who attended.
You can’t split an event’s cost to use the remaining £40 of the limit.
Include your whole team
Invite all employees, including part-time and remote staff. They don’t all have to attend.
Separate sites can hold their own annual parties. Departmental events can also qualify, provided every employee can attend one and you meet the other conditions.
A directors-only dinner won’t qualify when you exclude other employees who work for the business.
You can invite employees’ partners and family members too. Include them in your headcount. For a taxable event, an employee’s benefit can include their family or household guests’ costs as well as their own share.
Check business tax relief and VAT
Staff entertaining costs are generally deductible when you incur them wholly and exclusively for your business. For a limited company, this can reduce profits subject to Corporation Tax.
The £150 limit governs the employee benefit exemption. It doesn’t cap the staff entertaining expense your business can deduct.
Client entertaining is generally disallowed for business tax purposes. Keep clear records when you mix staff and client hospitality, as this can also affect employees’ costs.
A VAT-registered business can normally reclaim VAT on staff entertaining, subject to its VAT scheme and recovery rules. You’ll generally need to exclude non-employee guests’ shares.
VAT on directors-only entertainment is normally irrecoverable. You can normally reclaim VAT for directors who join a wider staff party.
Keep valid VAT invoices. Always use the VAT-inclusive cost when testing the £150 limit, even when you can reclaim VAT.
Plan for any taxable costs
Spending above the exemption can create an income tax charge for employees, plus reporting and National Insurance duties for your business.
A PAYE Settlement Agreement, or PSA, may let your business cover the tax and related National Insurance. You’ll need HMRC’s agreement, so speak to your accountant early and budget for the full cost.
Treat Christmas gifts separately
A Christmas gift costing £50 or less, including VAT, may qualify under the separate trivial benefits exemption.
It can’t be cash or a cash voucher, a reward for work or performance, a contractual entitlement, or part of salary sacrifice.
You can’t use the £50 gift limit to cover a party overspend.
Close companies include most owner-managed limited companies. Their directors face a £300 annual cap on exempt trivial benefits. Special rules can bring family or household benefits into that cap.
Your booking checklist
Check other annual events in the same tax year.
Budget for the full bill and allow for fewer attendees.
Give every employee access to a qualifying event.
Keep invitations, invoices, an attendance list and your calculations.
Check business tax relief, VAT and employee benefits separately.
Liondaris & Co can help you check the tax treatment, review your VAT claim and handle reporting duties.
Contact us well in advance of booking to talk through your Christmas party plans.
We’re ready to help!